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Nagarjuna Construction -Rising debt level to restrict earnings growth…
Nagarjuna Construction Co’s (NCC) Q3FY11 results were disappointing
on account of slippages seen due to i) extended monsoons, ii) delay in
release of payment and iii) procedural delays in getting clearances and
approvals for projects. With the management pruning down the FY11E
guidance by 9-10%, rising debt level and further equity commitment
towards the Nelcast power project, NCC’s core business growth would
be restricted (4.1% CAGR) during FY10-FY12E. Nonetheless, we
recommend ADD rating on the stock only on account of the fact that it
is trading at attractive valuation of 8.5x FY12 adjusted P/E and 1x P/BV.
Q3FY11 result below expectations; guidance pruned
NCC’s Q3FY11 revenues grew 12.7% to | 1,334.1 crore, below our
expectation of | 1,445 crore on account of adverse weather and delays
in receivables and approvals. The EBITDA margin declined 60 bps
sequentially to 9.5% due to these slippages. This coupled with higher
tax expenses (on account of provision for IT raids and rising interest
expenses due to rising debt level) led to a 15% YoY decline in the net
profit. Furthermore, the management has guided a 9-10% slippage in its
standalone revenue guidance of | 5,750 crore.
Stretching balance sheet to restrict earnings growth
NCC’s net debt to equity has risen to 0.94x in 9MFY11 vs. ~0.7x in FY10
on account of rising debt level to fund its rising WC requirement. We
believe NCC’s net debt to equity will rise to 1.1x in FY12E on account of
rising WC requirement and to fund its equity commitment towards the
Nelcast power project acquisition (NCC has invested | 150 crore and is
looking to invest ~ | 1,000 crore over the next few years).
Valuation
At the CMP, the stock is trading at 8.5x adjusted FY12E PE and 1x FY12
P/BV. We recommend ADD rating on the stock with a price target of |
110.
Q3FY11 disappoints; revenues, bottomline slippages seen
NCC reported a disappointing topline of | 1,334 crore as against our
expectation of | 1,445 crore on account of i) extended monsoons, ii)
delay in release of payment and iii) procedural delays in getting
clearances and approvals for projects. The company has estimated
a revenue slippage of | 195 crore in Q3FY11 on account of the
above-mentioned impediments
NCC took a hit of ~60 bps QoQ to report an EBITDA margin of 9.5%
in Q3FY11 as the impact of these hurdles passed through to the
margins
The reported PAT at | 40.4 crore also saw a slippage of ~ | 22 crore
on account of delays in payments and clearances. NCC had also
provided for provision of | 4 crore in Q3FY11 on account of
expected tax liability of | 15 crore. Having provided for | 8 crore in
Q2FY11 and Q3FY11, the company will provide for further | 7 crore
in Q4FY11E
The company also pruned down its earlier topline guidance by 9-
10% for FY11E on account of the slippages seen in 9MFY11
Strong order book; order inflow guidance maintained
NCC secured orders worth | 2,741 crore in Q3FY11 (| 6,236 crore
YTD) to close the order book at | 17,269 crore at the end of the
quarter. The management has maintained its order inflow guidance
of | 10,000 crore in FY11E
The management has indicated that that it expects to bag two IPP
EPC orders worth ~ | 3,000 crore in Q4FY11 apart from the | 4,500
EPC order book from the Nelcast power project
NCC’s exposure to the troublesome AP region is ~7%, mainly in
irrigation projects with ~ | 130 crore outstanding receivables in
Q3FY11 (up from | 30 crore in Q2FY11)
Acquisition of 55% stake in Nelcast Energy
During the quarter, NCC through its subsidiary NCC Power Projects
picked up a 55% equity stake of Nelcast Energy Corporation Ltd (NECL),
which is developing a 1,320 MW thermal power project at
Krishnapatnam for | 150 crore with Gayatri Project having a 45% stake.
The total project cost is ~ | 7000 with debt to equity in the ratio of 3:1.
NCC’s share of equity contribution was ~ | 1,000 crore over four years.
The company is in the process of financial closure (FC) for the project
and would require ~ | 150 crore of additional equity infusion for FC.
While NCC has applied for transfer of the Sompeta project coal linkages
to the Krishnapatnam plant, there are concerns from the environment
activists alleging increase in pollution through domestic coal, which
contains more of toxic waste leading to demand for revised MoEF
clearance.
Rising debt level to stretch balance sheet
NCC’s net debt to equity has risen to 0.94x in 9MFY11 vs. ~0.7x in FY10
on account of rising debt levels to fund its rising WC requirement. We
expect NCC’s net debt to equity to rise to 1.1x in FY12E further to fund
its deteriorating working capital position and equity commitment
towards the Nelcast power projects (NCC has invested | 150 crore and
is looking to invest ~ | 1,000 crore over the next few years).
Other highlights
The Bangalore elevated expressway (operational since April 2010)
generated revenues of ~ | 17.5 lakh per day in Q3FY11
OB Infra and Western UP Tollways are expected to commence
operation by March 2011 end while Pondicherry Tindivanam is
expected to commence from April 2011
Himachal Sorang project is expected to go on line by December
2011
Valuations
We have cut our EPS estimates by 25-35% for FY11E and FY12E in order
to account for slower than expected revenue growth and higher interest
expenses. The higher interest expenses are modelled in on account of i)
rising interest rate level ii) rising debt level to fund its deteriorating WC
requirement and equity commitment towards Nelcast power projects.
Consequently, we now believe NCC’s earnings would grow at a much
lower CAGR of 4.1% during FY10-FY12E despite 15.8% CAGR in topline
growth. Nonetheless, we recommend ADD rating on the stock on account
of cheaper valuations. At the CMP, the stock is trading at 8.5x FY12E
adjusted P/E and 1x FY12 P/BV.
We have valued NCC at | 110 per share based on the SOTP valuation
methodology. We now value it at 9x FY12 EPS vs. 12x FY12 EPS earlier
on account of slower than expected growth in earnings. The real estate
business is valued at 0.5x P/BV due to lack of clarity on NCC Harmony
development. We also highlight that we have not assigned any value to
its power business till the time it gets revised MoEF clearance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nagarjuna Construction -Rising debt level to restrict earnings growth…
Nagarjuna Construction Co’s (NCC) Q3FY11 results were disappointing
on account of slippages seen due to i) extended monsoons, ii) delay in
release of payment and iii) procedural delays in getting clearances and
approvals for projects. With the management pruning down the FY11E
guidance by 9-10%, rising debt level and further equity commitment
towards the Nelcast power project, NCC’s core business growth would
be restricted (4.1% CAGR) during FY10-FY12E. Nonetheless, we
recommend ADD rating on the stock only on account of the fact that it
is trading at attractive valuation of 8.5x FY12 adjusted P/E and 1x P/BV.
Q3FY11 result below expectations; guidance pruned
NCC’s Q3FY11 revenues grew 12.7% to | 1,334.1 crore, below our
expectation of | 1,445 crore on account of adverse weather and delays
in receivables and approvals. The EBITDA margin declined 60 bps
sequentially to 9.5% due to these slippages. This coupled with higher
tax expenses (on account of provision for IT raids and rising interest
expenses due to rising debt level) led to a 15% YoY decline in the net
profit. Furthermore, the management has guided a 9-10% slippage in its
standalone revenue guidance of | 5,750 crore.
Stretching balance sheet to restrict earnings growth
NCC’s net debt to equity has risen to 0.94x in 9MFY11 vs. ~0.7x in FY10
on account of rising debt level to fund its rising WC requirement. We
believe NCC’s net debt to equity will rise to 1.1x in FY12E on account of
rising WC requirement and to fund its equity commitment towards the
Nelcast power project acquisition (NCC has invested | 150 crore and is
looking to invest ~ | 1,000 crore over the next few years).
Valuation
At the CMP, the stock is trading at 8.5x adjusted FY12E PE and 1x FY12
P/BV. We recommend ADD rating on the stock with a price target of |
110.
Q3FY11 disappoints; revenues, bottomline slippages seen
NCC reported a disappointing topline of | 1,334 crore as against our
expectation of | 1,445 crore on account of i) extended monsoons, ii)
delay in release of payment and iii) procedural delays in getting
clearances and approvals for projects. The company has estimated
a revenue slippage of | 195 crore in Q3FY11 on account of the
above-mentioned impediments
NCC took a hit of ~60 bps QoQ to report an EBITDA margin of 9.5%
in Q3FY11 as the impact of these hurdles passed through to the
margins
The reported PAT at | 40.4 crore also saw a slippage of ~ | 22 crore
on account of delays in payments and clearances. NCC had also
provided for provision of | 4 crore in Q3FY11 on account of
expected tax liability of | 15 crore. Having provided for | 8 crore in
Q2FY11 and Q3FY11, the company will provide for further | 7 crore
in Q4FY11E
The company also pruned down its earlier topline guidance by 9-
10% for FY11E on account of the slippages seen in 9MFY11
Strong order book; order inflow guidance maintained
NCC secured orders worth | 2,741 crore in Q3FY11 (| 6,236 crore
YTD) to close the order book at | 17,269 crore at the end of the
quarter. The management has maintained its order inflow guidance
of | 10,000 crore in FY11E
The management has indicated that that it expects to bag two IPP
EPC orders worth ~ | 3,000 crore in Q4FY11 apart from the | 4,500
EPC order book from the Nelcast power project
NCC’s exposure to the troublesome AP region is ~7%, mainly in
irrigation projects with ~ | 130 crore outstanding receivables in
Q3FY11 (up from | 30 crore in Q2FY11)
Acquisition of 55% stake in Nelcast Energy
During the quarter, NCC through its subsidiary NCC Power Projects
picked up a 55% equity stake of Nelcast Energy Corporation Ltd (NECL),
which is developing a 1,320 MW thermal power project at
Krishnapatnam for | 150 crore with Gayatri Project having a 45% stake.
The total project cost is ~ | 7000 with debt to equity in the ratio of 3:1.
NCC’s share of equity contribution was ~ | 1,000 crore over four years.
The company is in the process of financial closure (FC) for the project
and would require ~ | 150 crore of additional equity infusion for FC.
While NCC has applied for transfer of the Sompeta project coal linkages
to the Krishnapatnam plant, there are concerns from the environment
activists alleging increase in pollution through domestic coal, which
contains more of toxic waste leading to demand for revised MoEF
clearance.
Rising debt level to stretch balance sheet
NCC’s net debt to equity has risen to 0.94x in 9MFY11 vs. ~0.7x in FY10
on account of rising debt levels to fund its rising WC requirement. We
expect NCC’s net debt to equity to rise to 1.1x in FY12E further to fund
its deteriorating working capital position and equity commitment
towards the Nelcast power projects (NCC has invested | 150 crore and
is looking to invest ~ | 1,000 crore over the next few years).
Other highlights
The Bangalore elevated expressway (operational since April 2010)
generated revenues of ~ | 17.5 lakh per day in Q3FY11
OB Infra and Western UP Tollways are expected to commence
operation by March 2011 end while Pondicherry Tindivanam is
expected to commence from April 2011
Himachal Sorang project is expected to go on line by December
2011
Valuations
We have cut our EPS estimates by 25-35% for FY11E and FY12E in order
to account for slower than expected revenue growth and higher interest
expenses. The higher interest expenses are modelled in on account of i)
rising interest rate level ii) rising debt level to fund its deteriorating WC
requirement and equity commitment towards Nelcast power projects.
Consequently, we now believe NCC’s earnings would grow at a much
lower CAGR of 4.1% during FY10-FY12E despite 15.8% CAGR in topline
growth. Nonetheless, we recommend ADD rating on the stock on account
of cheaper valuations. At the CMP, the stock is trading at 8.5x FY12E
adjusted P/E and 1x FY12 P/BV.
We have valued NCC at | 110 per share based on the SOTP valuation
methodology. We now value it at 9x FY12 EPS vs. 12x FY12 EPS earlier
on account of slower than expected growth in earnings. The real estate
business is valued at 0.5x P/BV due to lack of clarity on NCC Harmony
development. We also highlight that we have not assigned any value to
its power business till the time it gets revised MoEF clearance.
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