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Building blocks of a monopoly

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Image Credit: Narendra Bisht

NBCC has grown brick by brick, thanks to its unique business model for government infrastructure and housing projects.

On the banks of the Tigris in Iraq’s war-battered city of Mosul stands the Nineveh International Hotel. Once a luxury hotel, it was built in the 1980s when Saddam Hussein was in power and originally managed by India’s Oberoi Group. But in 2015, the Islamic State took control, and the hotel once patronised by the Iraqi elite became the stomping ground of fighters and suicide bombers. Early this year, the iconic hotel was finally recaptured by the Iraqi army and now its balconies, where guests once enjoyed a view of the river, are a vantage point for army snipers fighting Islamist insurgents across the waters.

Needless to say, the hotel isn’t a pretty sight today. Its former opulence has disappeared and intricate carvings on its outer walls have been shattered. But despite aerial bombings in its pool and TNT explosions in its atrium, the building still stands strong. Many of the rooms might have been gutted and the pyramid-like building leans slightly to one side—but it still stands.

Clearly the Nineveh hotel was built strong for it to manage to come through years of bombing relatively unscathed. And that’s thanks to an unlikely Indian public sector undertaking: NBCC, formerly National Buildings Construction Corporation.

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NBCC's works include the Agartala City Centre, the NIFT campus in Bengaluru, and the CBI headquarters in New Delhi (from top to bottom)

Apart from blue-chip state oil firms, India’s public sector units are generally associated with bureaucracy, inefficiency, and shoddy work. But NBCC is an exception: Though run by the government, it has a long list of construction projects from bridges and airports to colleges and offices under its belt. Over the years, the firm has also built some of the more ambitious government projects, from New Delhi’s sprawling SCOPE Complex designed for a consortium of public enterprises to the CBI headquarters’ swanky glass building in the capital.

But NBCC doesn’t just build grand government offices. It also has a virtual monopoly over the business of providing housing for nearly 2% of the country’s population working either for the central or state government or for public sector enterprises. The central government has awarded the responsibility of redeveloping swathes of residential government colonies in central Delhi such as Nauroji Nagar, Netaji Nagar, and East Kidwai Nagar—estimated to be worth Rs 25,000 crore—to the firm to meet the bureaucracy’s growing housing needs.

NBCC’s business model is simple. The government nominates the company for its housing and infrastructure projects without any bidding process. Costs are low because land ownership is never an issue, and the risks associated with traditional residential real estate development projects are erased because these houses are then bought by various government departments.  “NBCC believes in setting high standards when it comes to the construction business and also delivering on time,” says the company’s chairman and managing director, Anoop Kumar Mittal. “We have adopted the best practices and state-of-the art technology in the construction business to achieve a premier position and gain sustainable competitive advantage.”

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Monopolies are rare in India today. Economic reforms carried out by successive governments since 1991, have ensured that the public sector behemoths have had to contend with fierce competition from the private sector. But NBCC’s monopoly over providing housing and civic facilities for over 24 million people working for the central and state governments, as well as public sector enterprises has remained untouched. Is this never-ending support from the central government, which also happens to be NBCC’s promoter and biggest customer, a gift or a curse for the company?

Look at the numbers and it is clear being a monopoly has been good for NBCC. The company’s order book has swelled from roughly Rs 19,300 crore at the end of FY15 to nearly Rs 80,000 crore today. It is now a zero-debt company on a net basis, a rare feat in the construction industry. And it has been a Dalal Street darling since its IPO in 2012: Its share price rose nine-fold until a 1:5 stock split on June 3, 2016, outpacing the S&P BSE. Even after the stock split, the share price climbed 32% till February 21, 2017, once again clocking a growth rate faster than the Sensex. A bonus issue resulted in a correction on February 21 but the growth momentum has already returned.

Among construction companies, NBCC’s market cap, at Rs 17,977 crore, is second only to DLF. In the nine months till December 31, 2016, the company reported a net profit of Rs 176.32 crore on revenues of Rs 3,933 crore. Twenty years of profitability have turned a negative net worth of Rs 4.03 crore in 2000-01 to a net worth of Rs 1,489 crore at the end of 2015-16. “From 1998 till the mid-2000s, NBCC was a loss-making company but that did not deter us. With positive growth, we were listed as a mini ratna enterprise in 2012, and now we are a navratna company,” says Mittal.

Experts say there are several advantages to nominating NBCC for housing and infrastructure projects for public servants: The government keeps costs in check and cuts out the long-drawn process of tendering. Ramesh Nair, chief operating officer and business and international director (now CEO and country head) at real estate services firm Jones Lang LaSalle (JLL) India, says since land ownership does not change hands, the returns from sales go to the government. “Also, the need is for functional housing which will be created and handed over to the government on a no-cost basis,” he says. In certain redevelopment projects, like East Kidwai Nagar in New Delhi, NBCC also constructs commercial units that can be sold once the work is completed.

Yet, not everyone is gung-ho about NBCC. Some analysts have concerns about something very fundamental: the company’s business model. Though the government nominates NBCC for its projects, much of the actual work is done by the company’s sub-contractors. The responsibility to complete the projects in time, however, lies with NBCC. This model has led to delays in some projects. For instance, work in central Delhi government colonies, which was scheduled to start in the last quarter of FY17, will begin only in the second quarter of FY18.

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NBCC has built housing projects like the New Motibagh Green Complex in New Delhi.

This has affected the confidence analysts have in NBCC. Firms such as Ambit Capital, Nomura, Kotak Securities, and Anand Rathi have downgraded their rating on the company’s shares recently. “NBCC is a perfect example of perceived competitive advantages,” Ambit Capital warned investors on February 15. “Nomination can never be the sustainable right to win as seen with multiple state organisations,” it said. The firm said NBCC’s “stagnating and retiring talent”, “fragmented vendor ecosystem”, and the “implausible quantum” of real estate on sale in Delhi are worrisome.

Analysts are also concerned about project delays. “We are more concerned about execution of large redevelopment orders like the three large General Pool Residential Accommodation (GPRA) colonies,” said Nomura’s Amar Kedia and Priyankar Biswas in a note to investors on February 16. NBCC’s Mittal says the company is capable of compensating for lost time because of recent technology upgrades. But the truth is, even if NBCC speeds up its project, there will be criticism, because it’s a monopoly. The larger debate that divides economists is whether India needs a state-owned company functioning in a field kept out of reach of private players. Some like Ambit Capital question the sustainability of such a model and others raise doubts about the accountability of a free-market model.

Incorporated in 1960, NBCC has three divisions: project management consultancy, real estate, and EPC (engineering, procurement, and construction). Project management accounts for around 90% of the company’s revenue, which stood at Rs 5,749 crore in FY16. The division includes redevelopment of GPRA and offices and hospitals. The real estate division—NBCC either purchases land on its own, or becomes part of a joint venture or consortium—only contributes 4.8% of revenue. EPC projects such as chimneys and cooling towers, water and sewage treatment plants, and border fencing account for even less.

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Beyond borders: The battle-hit Nineveh International Hotel in Iraq was built by NBCC.

The government also relies on NBCC for refurbishment and maintenance of some of India’s architectural treasures. The company recently signed a memorandum of understanding for conservation of Purana Qila in New Delhi, and is refurbishing the Victoria Memorial in Kolkata. The renovation and redevelopment of the iconic exhibition grounds and convention centre at Pragati Maidan in New Delhi is also to be carried out by NBCC.

NBCC’s Mittal is unfazed by any criticism by analysts. When asked about the need for NBCC in the industry, Mittal told an analysts’ conference call in February last year: “There is no accountability of a private consultant investing money or incurring losses on behalf of the organisation (PSU/government agency).” He said costs would shoot up if the government opted for an international firm.

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Even if you disagree, there is no denying NBCC is not your average PSU. It hasn’t been since the days of Arup Roy Chowdhury, chairman between 2001 and 2010. When he took over as the youngest chairman of an Indian PSU, he had his task cut out. NBCC was making losses, and even struggled to pay his salary for the first six months. Chowdhury—whose previous stint was at DLF—brought in a culture of accountability to NBCC. The lumbering ways of age-old PSUs were replaced with the confident and competitive work ethic of a private enterprise.

His efforts paid off: NBCC turned a profit and was designated a mini ratna enterprise in 2012, the year it was listed on the BSE. The company’s performance has only improved under Mittal, who took over the reins in 2013. Its profit before tax has increased every year under his watch and in 2014 the government included it in the exclusive club of navratna companies.

Clearly, NBCC’s monopoly isn’t likely to be dismantled anytime soon. With few worries about getting business, Mittal’s main goal is to ensure timely execution of projects and prevent complacency from creeping into the company.