Nagarjuna Construction-EBITDA impresses, PAT in line: RBS

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Nagarjuna Construction
EBITDA impresses, PAT in line
Nagarjuna’s 2QFY11 EBITDA beat our estimate by 12% on improved order
execution and EBITDA margin expansion. PAT was in line given higher interest
expenses and tax provisions, prompting us to cut FY11-12F EPS by around 4%.
Management reiterated its strong 2H growth outlook to meet FY guidance. Buy.





2QFY11 EBITDA impresses, PAT in line
Nagarjuna’s parent reported PAT up 11% qoq and 4.7% yoy to Rs459.8m on 10.6% qoq and
12.6% yoy growth in net sales to Rs12.01bn. EBITDA margin improved 60bp qoq thanks to
lower construction expenses, with EBITDA beating our estimate by 12%. However, a 28%
qoq jump in interest expenses on higher debt and interest rates and increased tax provisions
meant that PAT exceeded our estimate by just 2.2%. At the consolidated level, PAT was
surprisingly strong in the seasonally weak quarter, rising 13% qoq and 35% yoy to Rs635m.

Management sees strong 2H outlook to meet full-year guidance
Management reiterated guidance for a sharp improvement in the project delivery schedule in
2H, putting it on course to meet full-year guidance on sales and EBITDA. This will require
yoy sales growth of over 30% in 2H vs around 10% in 1H, which we feel is achievable given
Nagarjuna’s high exposure to buildings and urban infrastructure projects. However, we now
assume a higher cost of borrowing for construction companies after the RBI’s recent baserate
policy move and higher tax provisions given the recent income tax department raids on
the company. This means our FY11-12 EPS forecasts for the parent fall around 4%.

Buy with revised target price of Rs197.8
On our EPS cuts, our target price falls 3% to Rs197.8. We maintain subsidiary value at
Rs43.4, already reflecting nil value for NCC Power (under litigation). We believe the Andhra
Pradesh power plant dispute and tax raids have driven the stock’s sharp underperformance
in the past three months. We expect the core construction business to improve traction in 2H
and three BOT road projects to start tolling next quarter; thus we feel the stock is attractively
valued at PEs of 10.8x FY11F and 8.6x FY12F adjusted for subsidiary value. The net debtto-
equity ratio (0.8x) is the best in our peer universe, which should support growth. We thus
maintain Nagarjuna as our top pick in the construction sector post its recent correction.