NAGARJUNA-Good performance; order intake remains muted– Edelweiss

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NAGARJUNA CONSTRUCTION
Good performance; order intake remains muted


􀂃 Revenue and PAT above estimates
Nagarjuna Construction’s (NCC) Q2FY11 top line, at INR 12 bn, was above our
expectation. Revenue jumped 12.6% and 10.6% Y-o-Y and Q-o-Q, respectively.
EBITDA margin, at 10.3%, rose 10bps and 50bps Y-o-Y and Q-o-Q, respectively.
However, due to higher tax rate, PAT margin remained flat at 3.8% Q-o-Q and
declined 30bps Y-o-Y.


􀂃 Order intake muted in Q2FY11
The company ended the quarter with an order book of ~INR 161 bn (~INR 154
bn at FY10 end and ~INR 160 bn at Q1FY11 end). Order intake in Q2FY11 stood
at ~INR 15 bn; YTD order intake stands at ~ INR 45 bn. NCC expects an order
intake of INR 100 bn in FY11E (excluding INR 50 bn from the power project)
which, we believe, is achievable considering order inflow in FY10 was at INR 89
bn. The company has maintained its top line guidance of INR 58 bn on a
standalone basis and INR 73 bn on consolidated basis, for FY11.

􀂃 Steady progress on BOT projects
NCC has five road BOT projects, of which two are already operational; the two
projects in UP and the Pondicherry project are expected to be completed by
December 2010 and January 2011, respectively. The Himachal Sorang power
project is expected to be completed by December 2011.

􀂃 Outlook and valuations: Attractive; maintain ‘BUY’
Our SOTP-based target price for the stock is INR 189, with BOT projects
contributing INR 22 to valuations. We have valued real estate investments at
book value, which contributes INR 13/share. Adjusting for the real estate and
BOT projects’ contribution, at CMP of INR 155, the contracting business is
available at implied P/E of 11.2x and 10.1x for FY11E and FY12E, respectively.

NCC is poised for long-term growth with presence in diverse segments and
strong execution capabilities. However, the Srikakulam power project and Dubai
real estate project need to be watched closely since both involve substantial
investments by the company. Adverse developments in these could be negative
triggers, but we have not factored them in our valuations. We recommend ‘BUY’
on the stock and rate it ‘Sector Outperformer’ on relative return basis