Nagarjuna Construction -2Q In-line But Risk increase: BofA ML

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Nagarjuna Construction Co.
2Q In-line But Risk increase
􀂄 NJCC 2Q11 In-line; Non-performing assets rise in realty & power
NJCC Rec PAT +5%YoY on 16%YoY higher interest cost and 38% higher tax on
IT raids despite good execution – sales Rs12bn +13%YoY and EBITDA Rs1.2bn
+13%YoY. We note that strategic risk in NJCC is increasing with >30% of its
capital stuck in non-moving businesses like Realty in Hyderabad & Dubai and now
in its failed thermal plant venture. We cut our FY11E EPS by ~4% on Rs120mn
tax provision. NJCC is a play on ensuing pick-up in capex esp. buildings and
roads. Its 22% EPS CAGR over FY10-12E and stock is inexpensive at 8.7x
FY11E EPS (parent) after recent underperformance supports our Buy.


Inflows fall 23%; Backlog +13%; Toll Roads Commission
2QFY11 consolidated order backlog at Rs161bn was +13%YoY while order inflows fell
23%YoY to Rs15bn. 2Q order Inflows was led by ~46% booking in building division. On
Infra SPVs, Bangalore Elevated tollway has started tolling in Jan ’10. UP/Orai-Bhognipur
Tollway is likely tolling in 4QFY11 and Himachal hydro plant to start by Dec’11.

Scale-up Infra portfolio…
NJCC is building value accretive Infra assets across power (380MW hydro) and
roads (5 roads – 3 toll roads, 2 annuity). We value this portfolio at ~20% of SOTP
and expect its value to rise as visibility improves; e.g. all the roads should be
operational by FY11.

… But Power & realty – key worry
Its realty investments (Rs7bn ~30% of net-worth) remain a concern: the launch of
its 26% realty JV with Tishman & I-Venture has been delayed by two years on
weak markets. Its Rs1.5bn equity in Dubai Harmony biotech park may run the risk
of loss. We fear that lack of environment clearance will lead to change of location
of its thermal power plant causing delays in its ability to supply 400MW committed
power on time in 2015 and risk encashment of Rs1.2bn performance guarantee.