NCC Ltd Q2 FY26: Profit Decline Amid Revenue Contraction Signals Execution Challenges

The quarter's performance was marked by a troubling combination of revenue contraction and margin pressure, with net sales declining 12.28% sequentially to ₹4,543.01 crores—the lowest quarterly revenue in recent periods. This represents a year-on-year decline of 12.57%, raising concerns about the company's order execution capabilities and project pipeline health. The operating profit margin, whilst relatively stable at 8.66%, could not prevent the significant profit erosion as interest costs remained elevated at ₹171.82 crores.

The quarter's results underscore a period of operational stress for NCC, with the company's financial trend officially turning negative. The deterioration is particularly concerning given that Q2 typically represents a stronger quarter for construction companies due to favourable weather conditions. The sequential decline in revenue from ₹5,178.99 crores in Q1 FY26 suggests project execution delays or a weakening order book, both of which pose medium-term challenges for the company's growth trajectory.

Financial Performance: Revenue Contraction Drives Profit Erosion

NCC's Q2 FY26 performance reflects a company grappling with execution challenges across its project portfolio. Net sales of ₹4,543.01 crores marked the lowest quarterly revenue in recent history, declining 12.28% sequentially and 12.57% year-on-year. This revenue contraction is particularly alarming given the company's historical track record of strong topline growth, having achieved a five-year sales compound annual growth rate of 22.72%. The sharp reversal suggests either significant project delays, order book depletion, or both.

Operating profit (PBDIT excluding other income) stood at ₹393.31 crores with a margin of 8.66%, representing a marginal 15 basis point decline from the previous quarter's 8.81%. Whilst the margin compression appears modest, the absolute operating profit decline of 13.77% quarter-on-quarter underscores the impact of lower revenue realisation. On a year-on-year basis, operating profit fell 11.21% from ₹442.95 crores in Q2 FY25, indicating persistent operational headwinds.

The profit before tax (PBT) declined 22.27% sequentially to ₹208.62 crores, with the company's tax rate moderating to 19.79% from 23.74% in the previous quarter. This lower tax incidence provided some cushion to the bottom line, though it could not prevent the significant profit erosion. Net profit margin contracted to 3.68% from 3.95% in Q1 FY26, reflecting the dual pressure of lower revenues and elevated interest costs.

Interest expenses remained stubbornly high at ₹171.82 crores, rising 5.01% quarter-on-quarter despite the company maintaining a relatively clean balance sheet with minimal long-term debt. This suggests elevated working capital borrowings, likely necessitated by slower project cash flows and delayed receivables. The operating profit to interest coverage ratio deteriorated to 2.29 times—the lowest in recent quarters—raising concerns about the company's ability to service debt comfortably whilst maintaining operational flexibility.

Operational Challenges: Execution Headwinds and Margin Pressure

The quarter's operational performance reveals deeper structural challenges beyond cyclical headwinds. The sharp 12.28% sequential revenue decline cannot be attributed solely to seasonal factors, as Q2 typically represents a stronger quarter for construction companies. The company's employee costs rose marginally to ₹208.97 crores from ₹203.13 crores, indicating that the workforce has not been scaled down proportionately to revenue contraction, thereby creating operating leverage pressures.

NCC's return on equity (ROE) stands at 11.19% on a trailing basis, which whilst improved from the five-year average of 8.65%, remains modest for a capital-intensive infrastructure business. The company's return on capital employed (ROCE) of 23.22% is more encouraging, suggesting that the core business generates reasonable returns when capital is efficiently deployed. However, the gap between ROCE and ROE indicates that the company's capital structure and working capital management require optimisation.

The company's balance sheet reveals a working capital-intensive business model with current assets of ₹17,634.53 crores against current liabilities of ₹13,128.03 crores as of March 2025. Trade payables stood at ₹8,205.52 crores, representing a significant 37% of annual revenue, which is typical for construction companies but requires careful management to avoid liquidity pressures. The cash flow from operations for FY2025 stood at ₹741 crores, down significantly from ₹1,359 crores in FY2024, indicating deteriorating cash generation capabilities.

Industry Context: Construction Sector Headwinds Amplify Company-Specific Challenges

NCC operates in India's construction and infrastructure sector, which has witnessed significant volatility in recent quarters due to extended monsoons, raw material price fluctuations, and execution delays across large projects. The company's 36.61% stock price decline over the past year significantly underperforms the construction sector's 7.00% decline, suggesting that NCC faces company-specific challenges beyond broader industry headwinds.

The infrastructure sector in India continues to benefit from robust government capital expenditure, particularly in roads, railways, and urban infrastructure. However, the translation of order wins into revenue has been slower than anticipated across the industry, with many companies reporting execution delays. For NCC, this challenge appears amplified, given the sharp sequential revenue decline despite having a diversified project portfolio across buildings, water, transportation, and electrical segments.

The construction sector's margin profile has been under pressure due to rising input costs, labour shortages, and project complexities. NCC's operating margin of 8.66% (excluding other income) remains within the industry range but has shown a declining trend from the 9.07% achieved in Q4 FY25. The company's ability to pass through cost increases to clients appears limited, particularly in fixed-price contracts, which likely constitute a significant portion of its order book.

Peer Comparison: Valuation Discount Reflects Operational Concerns

NCC trades at a significant valuation discount to its construction sector peers, with a price-to-earnings ratio of 16.11x compared to the industry average of approximately 33x. This discount reflects market concerns about the company's near-term growth prospects and execution capabilities. The stock's price-to-book value of 1.76x is also at the lower end of the peer spectrum, suggesting that investors are pricing in limited near-term upside potential.

The company's dividend yield of 1.07% is modest compared to peers like IndiGrid Trust (8.76%) and RITES (3.01%), though this is somewhat expected given NCC's growth-oriented business model. The company paid a dividend of ₹2.20 per share with an ex-dividend date of August 14, 2025, representing a payout ratio of 19.44%—conservative but appropriate given the current operational challenges and the need to preserve cash for working capital requirements.

NCC's zero debt-to-equity ratio (considering only long-term debt of ₹264.61 crores against shareholder funds of ₹7,323.71 crores) positions it favourably compared to peers, providing financial flexibility to navigate the current downturn. However, the elevated interest costs despite minimal long-term debt highlight the working capital intensity of the business and the need for better cash flow management.

Valuation Analysis: Attractive Entry Point or Value Trap?

At the current market price of ₹195.40, NCC trades at a P/E ratio of 16.11x trailing twelve-month earnings, representing a significant discount to both the construction sector average of 39x and the broader market. The stock's price-to-book value of 1.76x appears reasonable given the company's ROE of 11.19%, though the recent operational deterioration raises questions about the sustainability of this return profile.

The company's valuation grade stands at "Attractive," having been upgraded from "Fair" in May 2025. However, this assessment was made before the recent quarter's disappointing results, and the significant stock price decline of 40.16% from its 52-week high of ₹326.55 suggests that the market is reassessing the company's fair value. The stock currently trades just 14.97% above its 52-week low of ₹169.95, indicating limited downside cushion if operational challenges persist.

The PEG ratio of 3.71x suggests that the stock is not inexpensive relative to its growth prospects, particularly given the negative five-year EBIT growth trajectory. The EV/EBITDA multiple of 6.82x and EV/Sales of 0.59x indicate that the market is pricing in modest expectations for future performance. However, investors must weigh these seemingly attractive multiples against the deteriorating operational trends and the risk of further earnings downgrades.

Shareholding Pattern: Institutional Exodus Signals Waning Confidence

The shareholding pattern reveals a concerning trend of institutional investor exits over the past year. Foreign Institutional Investor (FII) holdings have declined dramatically from 20.87% in September 2024 to 12.87% in September 2025, representing a significant 8 percentage point reduction. This sustained selling pressure from FIIs, particularly the sharp 4.34% decline between March and June 2025, indicates deteriorating institutional confidence in the company's near-term prospects.

Mutual fund holdings have shown more stability, rising from 10.19% in September 2024 to 14.34% in September 2025, though there was a sequential decline of 0.89% in the latest quarter. This suggests that domestic institutional investors have taken a more nuanced view, potentially seeing long-term value despite near-term challenges. However, the recent quarter's decline indicates that even mutual funds are beginning to reassess their positions following the disappointing results.

Promoter holding remains stable at 22.11%, with no pledging of shares—a positive indicator of promoter confidence and financial stability. The promoter group is led by A V S R Holdings Private Ltd with 10.67%, followed by Sirisha Projects Private Limited with 3.35%. The absence of pledged shares eliminates one key risk factor, though it does not address the operational challenges facing the business.

Stock Performance: Severe Underperformance Across All Timeframes

NCC's stock performance has been dismal across all recent timeframes, with the stock declining 36.61% over the past year compared to the Sensex's 3.65% gain, resulting in a negative alpha of 40.26 percentage points. The year-to-date performance is even more concerning, with the stock down 28.80% against the Sensex's 6.62% gain. This severe underperformance of 35.42 percentage points YTD reflects mounting investor concerns about the company's operational trajectory.

The stock's technical position has deteriorated significantly, with the current price of ₹195.40 trading below all key moving averages—5-day (₹211.85), 20-day (₹210.04), 50-day (₹210.22), 100-day (₹216.85), and 200-day (₹216.11). This comprehensive breakdown of technical support levels indicates strong bearish sentiment, with the stock having changed to a "Bearish" trend on November 6, 2025. The high beta of 1.35 suggests that the stock is significantly more volatile than the broader market, amplifying downside risks during market corrections.

The longer-term picture provides some context, with the stock delivering impressive returns of 168.22% over three years and 462.30% over five years, significantly outperforming the Sensex. However, these historical gains have been largely eroded over the past year, and the current negative momentum raises questions about whether the stock can reclaim its previous trajectory without a meaningful improvement in operational performance.

Investment Thesis: Quality Company Facing Execution Headwinds

NCC's investment thesis rests on its established position in India's infrastructure sector, diversified project portfolio, and clean balance sheet. The company's quality grade of "Good" reflects its strong long-term track record, with five-year sales growth of 22.72% and EBIT growth of 17.84%. The absence of promoter pledging and healthy institutional participation of 29.52% provide additional comfort regarding corporate governance and long-term viability.

However, the current negative financial trend and bearish technical momentum significantly undermine the investment case. The company's operating profit to interest coverage of just 2.29 times—the lowest in recent quarters—indicates limited financial flexibility. The sharp sequential decline in revenue and profits, coupled with the lowest quarterly sales figure in recent periods, suggests that the company is facing more than just temporary headwinds.

The attractive valuation—trading at 16.11x P/E versus the industry's 39x—might appear compelling on the surface, but the PEG ratio of 3.71x and the recent operational deterioration suggest this discount is justified. The risk-reward profile has shifted unfavourably, with the stock classified as "High Risk Low Return" based on its one-year risk-adjusted return of -0.98 and volatility of 37.34%.

Outlook: Critical Monitoring Points Ahead

The outlook for NCC hinges on the company's ability to reverse the current negative trajectory through improved order execution, better working capital management, and stabilisation of revenue streams. The upcoming quarters will be critical in determining whether Q2 FY26 represents a temporary setback or the beginning of a more prolonged downturn.