Why is NCC falling/rising?

Recent Price Movement and Market Context

NCC Ltd’s shares have been on a steady decline, losing 6.54% over the past week and 17.70% in the last month, significantly underperforming the Sensex, which has remained relatively flat or positive during these periods. Year-to-date, the stock has plunged by 37.24%, while the Sensex has gained 8.65%. Over the last year, the stock’s decline is even more pronounced at 39.35%, contrasting sharply with the Sensex’s 7.31% rise. Despite this, the company’s longer-term performance remains robust, with a three-year return of 114.24% and a five-year return of 299.65%, both well above the benchmark’s gains.

On 24-Nov, the stock traded close to its 52-week low of ₹169.95, just 1.34% away, signalling persistent weakness. The share price also underperformed its sector by 1.22% on the day, and has been trading below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages, indicating a bearish technical outlook. Additionally, investor participation has waned, with delivery volumes dropping by nearly 40% compared to the five-day average, suggesting reduced buying interest.

Fundamental Challenges Weighing on the Stock

Despite some positive operational metrics, NCC’s recent financial results have disappointed investors. The company reported a quarterly PAT of ₹154.70 crore, which represents a sharp decline of 22.9% compared to the average of the previous four quarters. This drop in profitability has raised concerns about the company’s earnings momentum. Furthermore, the operating profit to interest coverage ratio has fallen to a low of 2.29 times, signalling increased pressure on the company’s ability to service its debt from operating profits.

Compounding these concerns is the company’s elevated debt-equity ratio of 2.76 times as of the half-year mark, the highest in recent periods. This heightened leverage may be viewed negatively by the market, especially in a rising interest rate environment or uncertain economic conditions. Although NCC maintains a relatively low Debt to EBITDA ratio of 0.97 times, the rising debt-equity ratio suggests increased reliance on borrowed funds, which could constrain financial flexibility.

While NCC boasts a strong management efficiency with a return on capital employed (ROCE) of 16.94% and has demonstrated healthy long-term growth with net sales increasing at an annual rate of 22.70% and operating profit growth of 17.73%, these positives have not been sufficient to offset the recent earnings decline and balance sheet concerns in the eyes of investors.

Institutional investors hold a significant 29.52% stake in NCC, reflecting confidence from sophisticated market participants who typically conduct thorough fundamental analysis. However, even this support has not prevented the stock’s underperformance, suggesting broader market scepticism about near-term prospects.

Comparative Market Performance and Valuation

Over the past year, NCC’s stock has generated a negative return of 39.35%, starkly contrasting with the broader market’s positive returns. This underperformance is partly attributable to a 7.1% decline in profits over the same period. Despite this, the stock’s valuation remains relatively attractive, trading at an enterprise value to capital employed ratio of 1.3, which is in line with its peers’ historical averages. This suggests that the market has already priced in much of the company’s recent challenges.

Liquidity remains adequate, with the stock’s average traded value supporting trades of approximately ₹1.05 crore based on 2% of the five-day average traded value. However, the declining delivery volumes and persistent price weakness indicate cautious sentiment among investors.

In summary, NCC Ltd’s share price decline is primarily driven by disappointing quarterly earnings, deteriorating profitability metrics, and increased leverage concerns. These factors have led to sustained underperformance relative to the broader market and sector peers, despite the company’s strong management efficiency and long-term growth prospects. Until there is a clear improvement in earnings and balance sheet metrics, the stock is likely to remain under pressure.

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