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Introduction
Nagarjuna Construction Company Ltd. (NCC), established in 1978, is an Indian
Construction Company, headquartered at Hyderabad. It has a well-diversified business
portfolio with presence across roads, buildings, water, irrigation and hydropower. It
has also secured construction orders in the international markets - UAE and Oman. Its
international business is undertaken through its two subsidiaries -- NCCL International
LLC and Nagarjuna Contracting Co LLC. Transportation, water sanitation and
building projects are currently being executed in international markets.
Investment Rationale
Industry Outlook: The Indian Construction Industry is the second largest employer
after the agriculture and contributes nearly 20% to the GDP. India’s infrastructure
investment has increased from 4.9% of Indian GDP in 2002-03 to 6% in 2009-10 and
is expected to touch 9.5% during FY11 (estimates of IMF). The GOI targets spending
$1 trillion on various Infrastructure projects in the 12th five-year plan up from
around $500 bn in the 11th five-year plan. The disbursements of IIFCL are expected
to reach around ` 20,000 crore by FY11 end. IIFCL had refinanced bank lendings
to infrastructure projects to the tune of `3,000 crore during FY10 and is expected
to more than double that amount in FY11. The share of private sector investment
in infrastructure in the 11th Plan is also expected to increase upto 36%. Moreover,
currently even the Public-Private Partnership (PPP) model is at a nascent stage in
emerging countries like India and China in terms of activity and sophistication,
signaling ample opportunities on the PPP model in future.
Strong and well-diversified order book: NCC’s current order book stands at ` 16075
Cr, 2.73x it’s consolidated FY10 revenue of ` 5878.6 Cr, providing strong revenue
visibility over the next 2-3 years. During Q2 FY11, the company bagged orders
worth ` 1480 Cr, taking the order inflow tally for FY211 to ` 4500 Cr. It is one of
the most diversified players in the infrastructure space, with an order book spreading
across various segments. This enables it to de-risk its topline from a slowdown in
any particular sector, in addition to opening up of opportunities in new business areas
(power, metals, oil & gas, mining, railways, etc). It has maintained an order inflow
guidance of ` 10,000cr for the year, which is achievable given its strong presence in
diversified verticals and ventures in new domains of growth. NCC is likely to meet
its FY11 guidance of ` 7300 Cr in revenues and ` 10000 Cr of order inflows with a
positive economic outlook and continued impetus on infrastructure spending.
Negligible exposure in volatile Andhra Pradesh: NCC’s exposure in the slow
moving state of Andhra Pradesh is only ~7% of its order book. It has completed
~75% of its work in AP and the remaining orders are largely from the third parties.
Moreover, the company is very optimistic about its projects in Bihar, Madhya Pradesh
and Maharashtra and is exploring opportunities in these states.
Foray into international markets: NCC’s international business ventures in Oman
and UAE has shown remarkable improvement in the past 3 years with revenues
growing at a CAGR of 122% between FY07- FY10 to ` 1,128 Cr. Revenue
contribution from the international segment has increased from a meager 3.6% in
FY07 to 19.7% in FY10. Currently, its international order book stands at ` 2704 Cr
primarily in the transportation, water sanitation and buildings sectors.
In also stands to benefit from the development of an airport in Oman (L-1) estimated
at around ` 3,200 Cr. The existence of government-funded projects in the international
order book largely insulates NCC from payment risks.
Moreover, NCC has planned construction of 2 towers for residential and commercial
purposes in Dubai (NCC Harmony) having 1.45 million sq.ft. of built-up area. It is
currently constructing the first tower (6 floors), at a total cost of ` 50 Cr and expects
to complete it by Q3FY10. It has already spent around ` 25 Cr and remaining will
be invested by CY11 end.
Diverse portfolio in Road & Power Sector: NCC Infrastructure Holdings Limited
(NCCIHL), a wholly owned subsidiary of NCC, is the investment vehicle of the
company, executing BOT/BOOT projects in roads and power sectors. Currently,
NCCIHL has a portfolio of 8 BOT projects worth `12,390 crore (including the share
of JV partners).
●● Road Portfolio: NCCIHL has a portfolio of 5 road projects of which 2 are
operational while the remaining projects are expected to become operational
by Q3FY11E. The company has made a total equity investment of `341 crore
(NCC’s share). Once operational, these five projects are expected to generate
annual revenues of ` 300-325 crore. NCC has also emerged L1 in a BOT Annuity
road project worth `1500 Cr for 4-laning of 163 kms stretch on the Ranchi-
Jamshedpur highway in Jharkhand
●● Power Projects: Among NCC’s power BOT projects, the company is developing
two hydropower projects (100 MW Himachal Sorang in partnership with Maytas,
the 280 MW Himalayan Green with SMEC) and one thermal power project (2640
MW plant at Sompeta for AP Govt). Himachal Sorang is ~50% complete and
is expected to commence operations in FY12. Construction of the Himalayan
Green plant has not yet started as certain approvals are awaited.
NCC is not hopeful on the outcome of the decision from MoEF for the Sompeta
Thermal Power Plant. The National Environment Appellate Authority has also
cancelled the environmental clearance. NCC had submitted ` 120 Cr of guarantee
and ` 40 Cr of bid bond guarantee under Case 1 bidding. It is required to supply
400 MW at ` 3.9/unit to AP government by 2015 through its power project or
buy the power from outside and sell it to the government for a maximum period
of one year. Hence, the company is now looking out for other places for setting
up a power project in case Sompeta project gets cancelled. If the company is
not able to supply power to AP government by 2015, then the guarantees may
be revoked. Besides, it has also invested ` 83 Cr for land acquisition and other
overhead costs in the Sompeta project.
Real Estate Project to unlock value in future: NCC has 80% stake in NCC
Urban Infrastructure (NCCUIL), which executes urban infrastructure projects like
development of residential and commercial complexes, serviced apartments, SEZs
and integrated townships. It also has a direct presence in the real estate sector through
three SPVs – JHLP, Tellapur Techno city and NCC Vishakhapatnam Urban. It is
currently executing 12 projects (out of 17 planned) and has a land bank of ~410 acres
spread across six Indian cities and Dubai.
Valuations
At a CMP of ` 124 the stock is trading at a P/E multiple of 13.3x Annualized EPS of `
9.32. NCC appears to be an attractive investment backed by a strong order book, foray
into international markets and a well-diversified portfolio in road and power sector.
Technical View
The stock is currently trading in the range of ` 120 and ` 140 levels. Major support
for the stock is around ` 119 & ` 109 levels. The resistances for the stock are around
135, 141 and 148 levels. We recommend accumulating the stock at Cmp and at lower
levels with a medium term perspective for a target of `. 148/-.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Introduction
Nagarjuna Construction Company Ltd. (NCC), established in 1978, is an Indian
Construction Company, headquartered at Hyderabad. It has a well-diversified business
portfolio with presence across roads, buildings, water, irrigation and hydropower. It
has also secured construction orders in the international markets - UAE and Oman. Its
international business is undertaken through its two subsidiaries -- NCCL International
LLC and Nagarjuna Contracting Co LLC. Transportation, water sanitation and
building projects are currently being executed in international markets.
Investment Rationale
Industry Outlook: The Indian Construction Industry is the second largest employer
after the agriculture and contributes nearly 20% to the GDP. India’s infrastructure
investment has increased from 4.9% of Indian GDP in 2002-03 to 6% in 2009-10 and
is expected to touch 9.5% during FY11 (estimates of IMF). The GOI targets spending
$1 trillion on various Infrastructure projects in the 12th five-year plan up from
around $500 bn in the 11th five-year plan. The disbursements of IIFCL are expected
to reach around ` 20,000 crore by FY11 end. IIFCL had refinanced bank lendings
to infrastructure projects to the tune of `3,000 crore during FY10 and is expected
to more than double that amount in FY11. The share of private sector investment
in infrastructure in the 11th Plan is also expected to increase upto 36%. Moreover,
currently even the Public-Private Partnership (PPP) model is at a nascent stage in
emerging countries like India and China in terms of activity and sophistication,
signaling ample opportunities on the PPP model in future.
Strong and well-diversified order book: NCC’s current order book stands at ` 16075
Cr, 2.73x it’s consolidated FY10 revenue of ` 5878.6 Cr, providing strong revenue
visibility over the next 2-3 years. During Q2 FY11, the company bagged orders
worth ` 1480 Cr, taking the order inflow tally for FY211 to ` 4500 Cr. It is one of
the most diversified players in the infrastructure space, with an order book spreading
across various segments. This enables it to de-risk its topline from a slowdown in
any particular sector, in addition to opening up of opportunities in new business areas
(power, metals, oil & gas, mining, railways, etc). It has maintained an order inflow
guidance of ` 10,000cr for the year, which is achievable given its strong presence in
diversified verticals and ventures in new domains of growth. NCC is likely to meet
its FY11 guidance of ` 7300 Cr in revenues and ` 10000 Cr of order inflows with a
positive economic outlook and continued impetus on infrastructure spending.
Negligible exposure in volatile Andhra Pradesh: NCC’s exposure in the slow
moving state of Andhra Pradesh is only ~7% of its order book. It has completed
~75% of its work in AP and the remaining orders are largely from the third parties.
Moreover, the company is very optimistic about its projects in Bihar, Madhya Pradesh
and Maharashtra and is exploring opportunities in these states.
Foray into international markets: NCC’s international business ventures in Oman
and UAE has shown remarkable improvement in the past 3 years with revenues
growing at a CAGR of 122% between FY07- FY10 to ` 1,128 Cr. Revenue
contribution from the international segment has increased from a meager 3.6% in
FY07 to 19.7% in FY10. Currently, its international order book stands at ` 2704 Cr
primarily in the transportation, water sanitation and buildings sectors.
In also stands to benefit from the development of an airport in Oman (L-1) estimated
at around ` 3,200 Cr. The existence of government-funded projects in the international
order book largely insulates NCC from payment risks.
Moreover, NCC has planned construction of 2 towers for residential and commercial
purposes in Dubai (NCC Harmony) having 1.45 million sq.ft. of built-up area. It is
currently constructing the first tower (6 floors), at a total cost of ` 50 Cr and expects
to complete it by Q3FY10. It has already spent around ` 25 Cr and remaining will
be invested by CY11 end.
Diverse portfolio in Road & Power Sector: NCC Infrastructure Holdings Limited
(NCCIHL), a wholly owned subsidiary of NCC, is the investment vehicle of the
company, executing BOT/BOOT projects in roads and power sectors. Currently,
NCCIHL has a portfolio of 8 BOT projects worth `12,390 crore (including the share
of JV partners).
●● Road Portfolio: NCCIHL has a portfolio of 5 road projects of which 2 are
operational while the remaining projects are expected to become operational
by Q3FY11E. The company has made a total equity investment of `341 crore
(NCC’s share). Once operational, these five projects are expected to generate
annual revenues of ` 300-325 crore. NCC has also emerged L1 in a BOT Annuity
road project worth `1500 Cr for 4-laning of 163 kms stretch on the Ranchi-
Jamshedpur highway in Jharkhand
●● Power Projects: Among NCC’s power BOT projects, the company is developing
two hydropower projects (100 MW Himachal Sorang in partnership with Maytas,
the 280 MW Himalayan Green with SMEC) and one thermal power project (2640
MW plant at Sompeta for AP Govt). Himachal Sorang is ~50% complete and
is expected to commence operations in FY12. Construction of the Himalayan
Green plant has not yet started as certain approvals are awaited.
NCC is not hopeful on the outcome of the decision from MoEF for the Sompeta
Thermal Power Plant. The National Environment Appellate Authority has also
cancelled the environmental clearance. NCC had submitted ` 120 Cr of guarantee
and ` 40 Cr of bid bond guarantee under Case 1 bidding. It is required to supply
400 MW at ` 3.9/unit to AP government by 2015 through its power project or
buy the power from outside and sell it to the government for a maximum period
of one year. Hence, the company is now looking out for other places for setting
up a power project in case Sompeta project gets cancelled. If the company is
not able to supply power to AP government by 2015, then the guarantees may
be revoked. Besides, it has also invested ` 83 Cr for land acquisition and other
overhead costs in the Sompeta project.
Real Estate Project to unlock value in future: NCC has 80% stake in NCC
Urban Infrastructure (NCCUIL), which executes urban infrastructure projects like
development of residential and commercial complexes, serviced apartments, SEZs
and integrated townships. It also has a direct presence in the real estate sector through
three SPVs – JHLP, Tellapur Techno city and NCC Vishakhapatnam Urban. It is
currently executing 12 projects (out of 17 planned) and has a land bank of ~410 acres
spread across six Indian cities and Dubai.
Valuations
At a CMP of ` 124 the stock is trading at a P/E multiple of 13.3x Annualized EPS of `
9.32. NCC appears to be an attractive investment backed by a strong order book, foray
into international markets and a well-diversified portfolio in road and power sector.
Technical View
The stock is currently trading in the range of ` 120 and ` 140 levels. Major support
for the stock is around ` 119 & ` 109 levels. The resistances for the stock are around
135, 141 and 148 levels. We recommend accumulating the stock at Cmp and at lower
levels with a medium term perspective for a target of `. 148/-.
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