Nagarjuna Construction -Maintain BUY:: Daiwa

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Nagarjuna Construction (NJCC IN) Rating:1
Revenue rise of 27% YoY needed for 2H FY11 to meet full-year guidance


What has changed?
• Nagarjuna Construction (NCC) announced revenue of Rs11.9bn (up 12% YoY)
and a PAT of Rs459m (up 4.7% YoY) versus our forecast of Rs410m for 2Q FY11
despite an increased tax rate. The consolidated PAT rose by 35% YoY to Rs635m.


Impact
• Despite poor results for 1H FY11, NCC has maintained its full-year revenue
guidance of Rs59bn on a standalone basis and Rs73bn on a consolidated basis. This
implies that the company would need to increase its revenue on a standalone basis
by 27% YoY for 2H FY11. Our revenue forecast is slightly lower at Rs57bn.
• NCC has also maintained its order-inflow guidance of Rs100bn for FY11
despite an inflow of only Rs35bn in the first half. The main orders should come
from the buildings, water and electrical segments. Also, after September the
company has secured orders worth Rs10bn.
• NCC made a provision of Rs40m for excess tax that could be required in the
light of an ongoing investigation by the Income Tax authorities. Management
expects the full impact of Rs100-150m and will make the provisions required
for 2H FY11. We have revised down slightly our FY11 EPS forecast to account
for increased tax.
• Environmental clearance for the 1,320MW power project has been cancelled.
However, the Chief Control of Forests is to make a fresh investigation and
submit a report to the Ministry of Environment and Forests by the end of
November 2010. If the verdict is unfavourable, NCC will be able to appeal to
the high court or find an alternative location for the power plant.

Valuation
• We maintain our SOTP-based six-month target price of Rs205. NCC trades
currently at a PER of around 8.4x on our FY12 EPS forecast adjusted for our
valuations of its subsidiaries.
Catalysts and action
• We maintain our 1 (Buy) rating for NCC. We believe a pick-up in project
execution is likely in 3Q FY11 and an improvement in order inflow should be
the key catalysts for the stock in the near term.