Nagarjuna Construction: Inline Q2; Low visibility on power project :HSBC

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Nagarjuna Construction
OW(V): Inline Q2; Low visibility on power project
 Q2 earnings were in line with expectation, though EBITDA
margin surprised us positively
 However, sustained lack of clarity on power plant will keep
near term share price performance muted, in our view
 Retain OW(V); lower TP to INR204 (INR248 earlier) as we cut
FY12-13 earnings by 8-15% to factor order inflow delays

Q2 earnings were in line, though EBITDA margins surprised us on the upside… NCC
reported 5% y-o-y earnings growth to INR459m (6% below HSBCe and in line with
consensus). This was on the back of 12.6% y-o-y sales growth to INR12bn (HSBCe of
INR12.3bn) and a better than expected EBITDA margin of 10.3% (HSBCe of 9.7%).
However, despite the good operating performance, earnings were pulled down by higher tax
provisioning owing to differences with income tax department on the tax liability.

…however share price could continue near term underperformance. While management
is “hopeful” of getting the necessary environmental clearance for its 1,320MW power plant
over the next few months, we believe the lack of clarity will hamper near term share price
growth. In the long term, the company can still manage to salvage the situation as it still has a
window of four to five years for completing the power plant.

We cut our earnings estimates by 8-15% over FY12-13 to factor in the delay in in-house
order inflows. We have revised our order inflow expectation for FY11 down by 29% to
INR93bn, primarily on the expectation of delay in in-house orders (delay in power project and
lack of road project awards by NHAI). Consequently, earnings have fallen by 17% in FY12
and 7% in FY13 (marginal change in FY11). Our revised earnings forecasts are c3-13% below
consensus across FY11-13.

Retain OW (V) with a lower TP of INR204 (INR248 earlier): We have cut our TP to
INR204 primarily on the back of lower earnings growth (23% 2 yr forward earnings CAGR
against 30% earlier) and a resultant expectation of target multiple contraction (13x from 15x
earlier). Our TP of INR204 is a sum-of-the-parts consisting of INR163 of core construction
business (13x Sep 2012 earnings) and INR43 for its subsidiaries. Key share price catalysts
include: Early approval for the in-house power project.