2QFY2011 – Nagarjuna Construction – Maintain Buy: Angel Broking

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2QFY2011 – Nagarjuna Construction – Maintain Buy (CMP: `155; TP: `196)

Standalone Numbers: NCC posted mixed numbers with decent performance on the top-line front which grew by 12.6% exactly in line with our estimates. However, on the earnings front the company disappointed mainly on account of higher interest cost led by higher loans and advances and hardening of interest rates during the quarter. Therefore, net profit came in at `46.0cr is10% below our estimates of `51.1cr inspite of higher other income. Further, company had provided for higher tax rate during the quarter ~38.3% which was primarily to factor in potential penalty from the recent Income Tax raid. In line with this we have factored in higher tax rate (~37%) for the fiscal. Management has maintained its revenue guidance at `5,750cr for the fiscal implying a healthy growth of ~28% for the 2HFY11.  

Key highlights from the concall

1)    Order inflow for the quarter was disappointing at `1,471cr taking the outstanding order book at Rs16,075cr (2.9xFY11E revenues), which is diversified across segments ~8 segments. However, the management has maintained its yearly guidance of `10,000cr and expecting the road segment to pick up in coming quarters.

2)      Bangalore elevated road project has started collecting toll from 7^th April, 2010 at the run rate of `17lakhs/day which has increased from `15lakhs/day as per 1QFY11. The other three road BOT projects are expected to be operational in FY11 and which would require investment to the tune of only `25-30cr. Management has guided that once all these projects are fully operational they have the potential to generate yearly revenues to the tune of `300-325cr out of which NCC’s share would be in the range of `150-160cr.

3)      Company has invested `85cr on its the 1320MW power project near Sompeta – `45cr towards land and remaining towards other overheads.  Company’s this coal-fired power project at Sompeta in Andhra Pradesh which hangs in a balance over suspended environment clearances, has got a one-year extension from the Karnataka government for supplying power. The `120cr performance guarantee, it had submitted on an agreement to supply 400MW of power from its new plant to Karnataka from end-2014 which is under jeopardy, gets some relief. Also, the bid bond guarantee of `40cr has been returned by the Karnataka government. Therefore, NCC has now entered into a second agreement to supply power bought from the open market until its plant is ready. But after that period of extension, NCC would have to begin supplying power generated at its facility and to Karnataka at `3.9/unit. However, the management has indicated that the expert appraisal committee of the environment ministry which is to meet this month to discuss a report submitted by the chief conservator of forests on coal-fired power projects in northern Andhra Pradesh and decide on clearances to NCC’s Sompeta project is expected to be negative and are searching for newer location for their power project.

4)      Its equity commitment for Himachal Sorang would be in the range `25-30cr over the next 12months till the time COD is achieved.

5)      Exposure towards AP remains at ~7-8% and current receivables are to the tune of `25-30cr.

Outlook and Valuation: NCC is well-placed to leverage the opportunity in the infrastructure space with one of the most diversified order books, and exposure in most of the growth sectors -transportation, water and power. We believe the BOT/BOOT project portfolio would also provide sustainable revenue streams as it would have five operational projects by FY2011E. NCC had mentioned earlier that for its thermal power plant of 1,320MW (under FC) it is looking for strategic partner. But given the recent news of land acquisitions problems on the site we believe that this stake sale would take longer than the earlier estimated time frame (2HFY2011) by the management. However, it does not affect our target price for the stock as we had considered only the equity invested for the project and that contributes mere 1% to our SOTP target price of `196. Therefore we maintain Buy on NCC given attractive valuations and positive outlook for the sector.