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Turbulent phase to subside
Higher interest dents profits
Nagarjuna Construction (NCC) reported Q3FY11 revenue of INR13.4b (12.5% higher y-y and 12.6% lower than our estimate). Lower growth was primarily caused by delays in customer payments,
land acquisition and extended monsoon season. EBITDA margin was 9.6% (30bps lower y-y and 10bps lower than our estimate). The decline was due to higher fixed overheads. Interest cost increased
43.3% y-y to INR438m due to higher debt and higher rates. The higher debt was used to fund higher working capital. After accounting for higher taxes due to the income tax raid, net income was 15.5% lower y-y at INR404.3 (6.4% lower than our estimate). The order book is at INR172.7b (including INR25.6b of international order book). It implies 2.8x FY11E revenue excluding international orders.
Earnings cut 10-22% over FY11-13
Based on lower growth during Q3FY11, we have reduced our earnings
expectations by 10-22% over FY11-13. Our revised FY11 revenue
estimate of INR52.7b is in line with the revised management guidance of
10% shortfall to its original estimate of INR58b. We have not assumed
any additional debt for the power plant as we are not valuing it
considering it is still in early stages. Debt to equity ratio is roughly 1x at
the end of Q3FY11, and debt is likely to increase by INR1.5b if the
financial closure of the project is completed by end-FY11. We have also
not assumed any order accretion from this project in our order inflows.
Valuation
We maintain our BUY rating based on a favourable risk-reward. We have
reduced our SOTP-based TP to INR133 from INR186 to factor in the
earnings cut. We value the standalone company at INR96/share, based
on 6.5x one-year forward NTM EBITDA (10x implied 1-year forward NTM
EPS). Our multiple is at a 10% discount to its 10-year historical mean
multiple. Power projects contribute INR2/share, based on 1.0x estimated
equity investment. Real-estate investments are valued at 0.5x invested
equity to arrive at INR13/share contribution. The highway BOT projects
contribute INR22. Risks to our TP include execution risk, inflationary risk
to margins due to raw material price increase, execution risk in the road
assets, and interest rate risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Turbulent phase to subside
- ƒQ3FY11:12.5% rev growth, 9.6% EBITDA mgn, 15% profit decline
- ƒ Interest cost 43% higher y-y, higher debt and interest rates
- ƒ Favorable risk-reward at current price level
- ƒ TP INR133: Std alone INR96, Others INR37
Higher interest dents profits
Nagarjuna Construction (NCC) reported Q3FY11 revenue of INR13.4b (12.5% higher y-y and 12.6% lower than our estimate). Lower growth was primarily caused by delays in customer payments,
land acquisition and extended monsoon season. EBITDA margin was 9.6% (30bps lower y-y and 10bps lower than our estimate). The decline was due to higher fixed overheads. Interest cost increased
43.3% y-y to INR438m due to higher debt and higher rates. The higher debt was used to fund higher working capital. After accounting for higher taxes due to the income tax raid, net income was 15.5% lower y-y at INR404.3 (6.4% lower than our estimate). The order book is at INR172.7b (including INR25.6b of international order book). It implies 2.8x FY11E revenue excluding international orders.
Earnings cut 10-22% over FY11-13
Based on lower growth during Q3FY11, we have reduced our earnings
expectations by 10-22% over FY11-13. Our revised FY11 revenue
estimate of INR52.7b is in line with the revised management guidance of
10% shortfall to its original estimate of INR58b. We have not assumed
any additional debt for the power plant as we are not valuing it
considering it is still in early stages. Debt to equity ratio is roughly 1x at
the end of Q3FY11, and debt is likely to increase by INR1.5b if the
financial closure of the project is completed by end-FY11. We have also
not assumed any order accretion from this project in our order inflows.
Valuation
We maintain our BUY rating based on a favourable risk-reward. We have
reduced our SOTP-based TP to INR133 from INR186 to factor in the
earnings cut. We value the standalone company at INR96/share, based
on 6.5x one-year forward NTM EBITDA (10x implied 1-year forward NTM
EPS). Our multiple is at a 10% discount to its 10-year historical mean
multiple. Power projects contribute INR2/share, based on 1.0x estimated
equity investment. Real-estate investments are valued at 0.5x invested
equity to arrive at INR13/share contribution. The highway BOT projects
contribute INR22. Risks to our TP include execution risk, inflationary risk
to margins due to raw material price increase, execution risk in the road
assets, and interest rate risk.
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