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Nagarjuna Construction – 3QFY2011 Result Update
Angel Broking maintains a Buy on Nagarjuna Construction with a Target Price of Rs. 173.
Nagarjuna Construction (NCC) posted disappointing performance on standalone
basis on the top-line front, and management acknowledged that revenue
guidance (`5,750cr for parent) for the year will not be met. Extended monsoons,
delays in payment by clients and land acquisition issues impacted top-line. We are
downgrading our FY2011 and FY2012 estimates to reflect the weak results. Our
Target PE multiple has also been lowered to 13x (14x). However, owing to
attractive valuations and diversified order book with exposure to most growth
sectors, we maintain a Buy on NCC.
Numbers disappoint: Top-line for the quarter stood at `1,336cr (`1,187cr)
increasing by a mere 12.5% yoy and below our estimate. Operating margins
came in at 9.6% (9.9%) in line with our estimates. However, earnings declined by
15.3% yoy to `40.5cr on account of higher interest cost and tax rate of 41.0%,
which increased primarily to factor in potential penalty from the Income Tax raid.
Outlook and Valuation: NCC is well-placed to leverage the emerging
opportunities in the infrastructure space on account of having one of the most
diversified order books in industry, and exposure to most of the growth sectors –
transportation, water and power. We believe the company’s BOT/BOOT project
portfolio would also provide sustainable revenue stream as five projects would be
operational by end FY2011. NCC remains one of our top picks in the infra space.
At the CMP of `104, the stock is trading at attractive valuations - P/E of 5.3x and
P/B of 0.5x on FY2012 basis adjusting for its investment in real estate and BOT.
We maintain a Buy on the stock, with an revised SOTP Target Price of `173
(`196), wherein the core construction business has been valued at a P/E of 13x
FY2012E EPS of `9.0 (`116.7/share), NCC International at a P/E of 10x FY2012E
EPS of `2.3 (`22.5/share), the real estate business (`7.0/share) and the road and
power venture have been valued at 1.5x the equity invested (`26.8/share).
Execution slows down once again
NCC’s top-line for the quarter stood at `1,336cr (`1,187cr), increasing by a mere
12.5% yoy and below our estimate. Top-line disappointed due to extended
monsoons, delays in payment by clients and land acquisition issues. Further,
management acknowledged that its revenue guidance (`5,750cr for parent) for the
year will not be met.
On the order booking front, the company fared well bagging orders worth
`2742cr despite some slippages, which were expected due to the macro
headwinds. The company has maintained its FY2011 order inflow guidance of
`10,000cr, implying an order inflow of `3,750 for 4QFY2011. We believe this is
achievable given that the company is L1 for orders worth `3,000cr. Moreover, if
the company achieves financial closure for its captive power plant it could provide
further impetus on the order booking front.
To reflect the weak results, we have revised downwards our top-line estimate for
FY2011, but maintained the same for FY2012 given the decent traction in order
inflow and strong order backlog.
Stable operating margins, but below-par net margins
Operating margins for the quarter, on a standalone basis, came in at 9.6% (9.9%)
in line with our estimate of 9.6%. However, earnings disappointed mainly on
account of the increase in interest cost led by higher working capital needs and
hardening of interest rates during the quarter. Thus, net profit at `40.5cr reported
a decline of 15.3% yoy and came in below our estimate of `52.3cr as well. The
company provided for higher tax rate during the quarter of ~41.0% primarily to
factor in the potential penalty from the recent Income Tax raid (~`15cr).
Accordingly, we have factored in higher tax rate of ~37.7% for FY2011.
Order Book Analysis
NCC’s order book, which stood at `17,269cr (3.2x FY2011E revenues) as on
3QFY2011, is spread across nine verticals and the major contributors include the
building, water and road segments. The company has maintained its guidance of
order inflow of `10,000cr for FY2011, which we believe is achievable given its
strong presence in diversified verticals and ventures in new domains of growth.
Going ahead, management expects the road, building and water segments to
gather momentum.
NCC Power Projects acquires 55% stake in Nelcast Energy
Corporation - Positive
Details: NCC’s subsidiary, NCC Power Projects, has acquired 55% stake in Nelcast
Energy Corporation (NECL), which is setting up a 1,320MW thermal power plant
at Nellore District, AP. The project based on imported coal and super critical
technology is being set up at an estimated cost of `7,000cr. The land requirement
for the project is ~865 acres (plus an additional area of 150 acres for the coal
and pipeline corridor). Out of the 865acres, ~291 acres is government land and
~574 acres is private land (458 acres owned by NECL and for ~116 acres the
acquisition agreement is in place). Further, the land is away from the CRZ area.
The project will use imported coal as fuel supported by the secondary fuel oil for
start up. The imported coal will be received at the Krishnapatnam port. All the
environmental clearances are in place for the project (Source: NECL environment
study report).
Our take: We believe that the acquisition is in line with NCC’s commitment made
to the Karnataka government of supplying power by the end 2015 (including the
extension period) or forfeit the performance guarantee of `120cr. NCC Power had
earlier planned to set up a 2x660MW power plant in Somapeta, Srikakulam
district, Andhra Pradesh, but the environmental clearance was revoked. Hence,
NCC was aggressively scouting for a new location for the project. Therefore, NCC
acquired the 55% stake in NECL for ~`150cr (50% premium).
Pertinently, the NECL project is expected to get commissioned in ~5 years as the
BTG orders are yet to be awarded and financial closure is also pending. Since the
project is at the awarding stage, NCC’s parent may bag the EPC order for the
same thereby boosting NCC’s order inflow, which would be a positive. However, it
should be noted that the company will have to dilute on the IRR front, apart from
immediate cash outflow of `150cr. Nonetheless, given NCC’s comfortable
debt/equity position and limited equity commitment for its BOT portfolio, we
believe that cash outflow would not be a problem. Thus, overall the deal, prime
facie, appears positive for NCC.
BOT projects
The Bangalore elevated road project started collecting toll from April 7, 2010 at
the run rate of `17.5lakh/day, which has increased from `17lakh/day as of
2QFY2011. The other three road BOT projects are expected to be operational in
FY2011. Management has guided that once all the projects are fully operational,
potential annual revenues would be ~`300-325cr, of which NCC’s share would
be ~ `150-160cr.
Outlook and Valuation
NCC is well-placed to leverage the opportunity in the infrastructure space with one
of the most diversified order books in industry, and exposure to most of the growth
sectors – transportation, water and power. We believe the company’s BOT/BOOT
project portfolio would also provide sustainable revenue stream as five of its
projects would get operational by end FY2011. To reflect the weak 3QFY2011
results we are pruning our FY2011 and FY2012 estimates as well as lowering our
Target PE multiple to 13x (14x earlier).
At the CMP of `104, the stock is trading at attractive valuations - P/E of 5.3x and
P/B of 0.5x on FY2012 basis adjusting for its investment in real estate and BOT.
NCC remains one of our top picks in the infra space. We maintain a Buy on NCC
owing to attractive valuations and diversified order book with exposure to most of
the growth sectors. Our revised SOTP Target Price works out to `173 (`196),
wherein the core construction business has been valued at a P/E of 13x FY2012E
EPS of `9.0 (`116.7/share), NCC International at a P/E of 10x FY2012E EPS of
`2.3 (`22.5/share), the real estate business (`7.0/share) and the road and power
venture have been valued at 1.5x the equity invested (`26.8/share).
Investment Arguments
Diversified order book: NCC, with its diversified presence (order book of
`17,269cr spread across eight segments), is well placed to benefit from the current
construction boom in the country, especially in the transportation segment. We
believe that diversification was one of the prime reasons for NCC registering
healthy 29% earnings growth in FY2010 vis-à-vis its peers. This has also led to
strong order booking – clocked ~40% growth in FY2010.
Modest equity requirement: NCC has a portfolio of 5 BOT road projects and all
are expected to be operational in FY2011 with limited equity requirement of
`25-30cr. NCC has not won any BOT projects in recent times and stayed away
from fierce competition along with having a healthy balance sheet (has one of the
lowest net debt/equity position at 0.6x FY2010 revenues). Therefore, we believe
that NCC is better placed than peers to win projects from NHAI going ahead.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nagarjuna Construction – 3QFY2011 Result Update
Nagarjuna Construction (NCC) posted disappointing performance on standalone
basis on the top-line front, and management acknowledged that revenue
guidance (`5,750cr for parent) for the year will not be met. Extended monsoons,
delays in payment by clients and land acquisition issues impacted top-line. We are
downgrading our FY2011 and FY2012 estimates to reflect the weak results. Our
Target PE multiple has also been lowered to 13x (14x). However, owing to
attractive valuations and diversified order book with exposure to most growth
sectors, we maintain a Buy on NCC.
Numbers disappoint: Top-line for the quarter stood at `1,336cr (`1,187cr)
increasing by a mere 12.5% yoy and below our estimate. Operating margins
came in at 9.6% (9.9%) in line with our estimates. However, earnings declined by
15.3% yoy to `40.5cr on account of higher interest cost and tax rate of 41.0%,
which increased primarily to factor in potential penalty from the Income Tax raid.
Outlook and Valuation: NCC is well-placed to leverage the emerging
opportunities in the infrastructure space on account of having one of the most
diversified order books in industry, and exposure to most of the growth sectors –
transportation, water and power. We believe the company’s BOT/BOOT project
portfolio would also provide sustainable revenue stream as five projects would be
operational by end FY2011. NCC remains one of our top picks in the infra space.
At the CMP of `104, the stock is trading at attractive valuations - P/E of 5.3x and
P/B of 0.5x on FY2012 basis adjusting for its investment in real estate and BOT.
We maintain a Buy on the stock, with an revised SOTP Target Price of `173
(`196), wherein the core construction business has been valued at a P/E of 13x
FY2012E EPS of `9.0 (`116.7/share), NCC International at a P/E of 10x FY2012E
EPS of `2.3 (`22.5/share), the real estate business (`7.0/share) and the road and
power venture have been valued at 1.5x the equity invested (`26.8/share).
Execution slows down once again
NCC’s top-line for the quarter stood at `1,336cr (`1,187cr), increasing by a mere
12.5% yoy and below our estimate. Top-line disappointed due to extended
monsoons, delays in payment by clients and land acquisition issues. Further,
management acknowledged that its revenue guidance (`5,750cr for parent) for the
year will not be met.
On the order booking front, the company fared well bagging orders worth
`2742cr despite some slippages, which were expected due to the macro
headwinds. The company has maintained its FY2011 order inflow guidance of
`10,000cr, implying an order inflow of `3,750 for 4QFY2011. We believe this is
achievable given that the company is L1 for orders worth `3,000cr. Moreover, if
the company achieves financial closure for its captive power plant it could provide
further impetus on the order booking front.
To reflect the weak results, we have revised downwards our top-line estimate for
FY2011, but maintained the same for FY2012 given the decent traction in order
inflow and strong order backlog.
Stable operating margins, but below-par net margins
Operating margins for the quarter, on a standalone basis, came in at 9.6% (9.9%)
in line with our estimate of 9.6%. However, earnings disappointed mainly on
account of the increase in interest cost led by higher working capital needs and
hardening of interest rates during the quarter. Thus, net profit at `40.5cr reported
a decline of 15.3% yoy and came in below our estimate of `52.3cr as well. The
company provided for higher tax rate during the quarter of ~41.0% primarily to
factor in the potential penalty from the recent Income Tax raid (~`15cr).
Accordingly, we have factored in higher tax rate of ~37.7% for FY2011.
Order Book Analysis
NCC’s order book, which stood at `17,269cr (3.2x FY2011E revenues) as on
3QFY2011, is spread across nine verticals and the major contributors include the
building, water and road segments. The company has maintained its guidance of
order inflow of `10,000cr for FY2011, which we believe is achievable given its
strong presence in diversified verticals and ventures in new domains of growth.
Going ahead, management expects the road, building and water segments to
gather momentum.
NCC Power Projects acquires 55% stake in Nelcast Energy
Corporation - Positive
Details: NCC’s subsidiary, NCC Power Projects, has acquired 55% stake in Nelcast
Energy Corporation (NECL), which is setting up a 1,320MW thermal power plant
at Nellore District, AP. The project based on imported coal and super critical
technology is being set up at an estimated cost of `7,000cr. The land requirement
for the project is ~865 acres (plus an additional area of 150 acres for the coal
and pipeline corridor). Out of the 865acres, ~291 acres is government land and
~574 acres is private land (458 acres owned by NECL and for ~116 acres the
acquisition agreement is in place). Further, the land is away from the CRZ area.
The project will use imported coal as fuel supported by the secondary fuel oil for
start up. The imported coal will be received at the Krishnapatnam port. All the
environmental clearances are in place for the project (Source: NECL environment
study report).
Our take: We believe that the acquisition is in line with NCC’s commitment made
to the Karnataka government of supplying power by the end 2015 (including the
extension period) or forfeit the performance guarantee of `120cr. NCC Power had
earlier planned to set up a 2x660MW power plant in Somapeta, Srikakulam
district, Andhra Pradesh, but the environmental clearance was revoked. Hence,
NCC was aggressively scouting for a new location for the project. Therefore, NCC
acquired the 55% stake in NECL for ~`150cr (50% premium).
Pertinently, the NECL project is expected to get commissioned in ~5 years as the
BTG orders are yet to be awarded and financial closure is also pending. Since the
project is at the awarding stage, NCC’s parent may bag the EPC order for the
same thereby boosting NCC’s order inflow, which would be a positive. However, it
should be noted that the company will have to dilute on the IRR front, apart from
immediate cash outflow of `150cr. Nonetheless, given NCC’s comfortable
debt/equity position and limited equity commitment for its BOT portfolio, we
believe that cash outflow would not be a problem. Thus, overall the deal, prime
facie, appears positive for NCC.
BOT projects
The Bangalore elevated road project started collecting toll from April 7, 2010 at
the run rate of `17.5lakh/day, which has increased from `17lakh/day as of
2QFY2011. The other three road BOT projects are expected to be operational in
FY2011. Management has guided that once all the projects are fully operational,
potential annual revenues would be ~`300-325cr, of which NCC’s share would
be ~ `150-160cr.
Outlook and Valuation
NCC is well-placed to leverage the opportunity in the infrastructure space with one
of the most diversified order books in industry, and exposure to most of the growth
sectors – transportation, water and power. We believe the company’s BOT/BOOT
project portfolio would also provide sustainable revenue stream as five of its
projects would get operational by end FY2011. To reflect the weak 3QFY2011
results we are pruning our FY2011 and FY2012 estimates as well as lowering our
Target PE multiple to 13x (14x earlier).
At the CMP of `104, the stock is trading at attractive valuations - P/E of 5.3x and
P/B of 0.5x on FY2012 basis adjusting for its investment in real estate and BOT.
NCC remains one of our top picks in the infra space. We maintain a Buy on NCC
owing to attractive valuations and diversified order book with exposure to most of
the growth sectors. Our revised SOTP Target Price works out to `173 (`196),
wherein the core construction business has been valued at a P/E of 13x FY2012E
EPS of `9.0 (`116.7/share), NCC International at a P/E of 10x FY2012E EPS of
`2.3 (`22.5/share), the real estate business (`7.0/share) and the road and power
venture have been valued at 1.5x the equity invested (`26.8/share).
Investment Arguments
Diversified order book: NCC, with its diversified presence (order book of
`17,269cr spread across eight segments), is well placed to benefit from the current
construction boom in the country, especially in the transportation segment. We
believe that diversification was one of the prime reasons for NCC registering
healthy 29% earnings growth in FY2010 vis-à-vis its peers. This has also led to
strong order booking – clocked ~40% growth in FY2010.
Modest equity requirement: NCC has a portfolio of 5 BOT road projects and all
are expected to be operational in FY2011 with limited equity requirement of
`25-30cr. NCC has not won any BOT projects in recent times and stayed away
from fierce competition along with having a healthy balance sheet (has one of the
lowest net debt/equity position at 0.6x FY2010 revenues). Therefore, we believe
that NCC is better placed than peers to win projects from NHAI going ahead.
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