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NAGARJUNA CONSTRUCTION
Disappointing quarter; strong order pipeline
Results below expectations
Nagarjuna Construction’s (NCC) Q3FY11 PAT at INR 404 mn, down 16% Y-o-Y,
was 27% below our estimate. This was on account of revenue at INR 13.5 bn
coming in 8% lower than our estimate (due to extended Monsoons and land
acquisition issues) and significantly higher interest costs (INR 438 mn, up 43%
Y-o-Y) on worsening working capital scenario. EBITDA margin, at 9.6%, declined
40bps Y-o-Y.
Order pipeline remains strong
Order intake during the quarter remained healthy at INR 27.4 bn; YTD order
intake stands at INR 62.4 bn versus INR 93.0 bn in FY10. Order pipeline remains
strong with an INR 3.0 bn order in power segment likely to be added in Q4FY11
besides INR 4.5 bn internal EPC order from the Nelcast power plant.
Nelcast purchase positive but funding could be an issue
During the quarter, NCC purchased 55% stake in Nelcast power plant for INR 1.5
bn. All key approvals for the project are already in place. NCC needs to infuse
further equity of INR 7.5 bn over the next three-four years (INR 1.5 bn in
Q4FY11), which could be issue given tightening cash flows in core construction
business.
Earnings cut sharply to factor in rising interest costs
We have revised down our earnings 18% for FY11E and 27% for FY12E, factoring
in Q3FY11 performance and higher interest costs on worsened working capital
scenario and rise in interest rates by 250bps. As a result, we now estimate
earnings to remain flat in FY12.
Outlook and valuations: Execution pick up key; maintain ‘BUY’
We have revised down our SOTP-based target price for the stock to INR 124
/share (INR 189 earlier). This consists of INR 91/share from construction valued
at 10x FY12E P/E (12x earlier) and INR 20/share from BOT projects. We have
valued real estate investments at book value, which contributes INR 13/share.
We have not valued the Nelcast power plant as yet since financial closure is
pending.
We maintain our ‘BUY’ recommendation on the stock and rate it ‘Sector
Outperformer’ on relative return basis.
BOT projects progressing well
NCC has five BOT road projects, of which, three are toll projects and two annuity based.
One toll and one annuity project is already operational. Daily toll collection at the
Bengaluru elevated toll project is INR 1.75 mn. The company expects one more toll and
one annuity project (both in Uttar Pradesh) to be operational by FY11 end and the
Pondicherry-Tindivanam toll project to be completed by April 2011.
In the power space, the company has three projects. Execution on the 100 MW Himachal
Sorang hydel power plant is underway and completion is expected by December 2011.
The 280 MW Himalayan Green hydel power plant is still in the pre-development stage.
Dubai real estate project
The company has restarted execution on the Dubai real estate project. It plans to
construct six floors in the first tower by March 2011. Post this, NCC will be able to
demand milestone payments from customers. It has invested INR 500 mn recently in
addition to the INR 600 mn initial equity infusion.
Company Description
NCC is one of the largest construction players in India and undertakes civil construction
in segments such as transportation, water & irrigation, buildings, power, transmission
and distribution. The company has ventured into railways, oil & gas, and metals and has
also entered the Middle East where it currently undertakes works in roads, buildings, and
water segments. NCC is also one of the large players in the asset development space,
with a portfolio of 11 BOT projects spread across roads, power and airports. It also has a
land bank of 529 acres spread across Hyderabad, Bangalore and Chennai.
Investment Theme
NCC is a well diversified player in the construction space. Given that NCC has built
capabilities across various verticals of infrastructure, a slowdown in one vertical will not
deter its growth as it can always take orders in other verticals. NCC also has a portfolio
of 9 BOT projects—five roads, three power, and one convention center. These projects
are expected to be value accretive in the long term. Moreover NCC has a total land bank
of 529 acres—444 acres (under NCC Urban Infra (80% owned by NCC) and 85 acres
under NCC Vizag Urban Infra (95% owned by NCC). The land bank is spread across
Hyderabad, Bangalore and Chennai. Even though the company has put on hold its
development plans due to soft real estate market, these land holdings are expected to
result in significant value accretion as and when the real estate market improves.
Key Risks
Threat of equity dilution: The company’s venture into the BOT and real estate
segments will demand upfront investments with returns being back-ended. Though the
company has pruned its real estate plans considerably, its plans to set up BOT projects
will need funding in the future, possibly leading to a rise in leverage.
Decrease in government spending could affect order intake: Although we believe
the thrust on infrastructure spending by the government will continue, given that public
sector finances are getting stretched, any decrease in spending could affect order intake
and growth assumptions. Even though NCC is a well-diversified player and is to that
extent insulated by order intake risks to any particular vertical, overall decrease in
spending could have a bearing on its growth prospects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NAGARJUNA CONSTRUCTION
Disappointing quarter; strong order pipeline
Results below expectations
Nagarjuna Construction’s (NCC) Q3FY11 PAT at INR 404 mn, down 16% Y-o-Y,
was 27% below our estimate. This was on account of revenue at INR 13.5 bn
coming in 8% lower than our estimate (due to extended Monsoons and land
acquisition issues) and significantly higher interest costs (INR 438 mn, up 43%
Y-o-Y) on worsening working capital scenario. EBITDA margin, at 9.6%, declined
40bps Y-o-Y.
Order pipeline remains strong
Order intake during the quarter remained healthy at INR 27.4 bn; YTD order
intake stands at INR 62.4 bn versus INR 93.0 bn in FY10. Order pipeline remains
strong with an INR 3.0 bn order in power segment likely to be added in Q4FY11
besides INR 4.5 bn internal EPC order from the Nelcast power plant.
Nelcast purchase positive but funding could be an issue
During the quarter, NCC purchased 55% stake in Nelcast power plant for INR 1.5
bn. All key approvals for the project are already in place. NCC needs to infuse
further equity of INR 7.5 bn over the next three-four years (INR 1.5 bn in
Q4FY11), which could be issue given tightening cash flows in core construction
business.
Earnings cut sharply to factor in rising interest costs
We have revised down our earnings 18% for FY11E and 27% for FY12E, factoring
in Q3FY11 performance and higher interest costs on worsened working capital
scenario and rise in interest rates by 250bps. As a result, we now estimate
earnings to remain flat in FY12.
Outlook and valuations: Execution pick up key; maintain ‘BUY’
We have revised down our SOTP-based target price for the stock to INR 124
/share (INR 189 earlier). This consists of INR 91/share from construction valued
at 10x FY12E P/E (12x earlier) and INR 20/share from BOT projects. We have
valued real estate investments at book value, which contributes INR 13/share.
We have not valued the Nelcast power plant as yet since financial closure is
pending.
We maintain our ‘BUY’ recommendation on the stock and rate it ‘Sector
Outperformer’ on relative return basis.
BOT projects progressing well
NCC has five BOT road projects, of which, three are toll projects and two annuity based.
One toll and one annuity project is already operational. Daily toll collection at the
Bengaluru elevated toll project is INR 1.75 mn. The company expects one more toll and
one annuity project (both in Uttar Pradesh) to be operational by FY11 end and the
Pondicherry-Tindivanam toll project to be completed by April 2011.
In the power space, the company has three projects. Execution on the 100 MW Himachal
Sorang hydel power plant is underway and completion is expected by December 2011.
The 280 MW Himalayan Green hydel power plant is still in the pre-development stage.
Dubai real estate project
The company has restarted execution on the Dubai real estate project. It plans to
construct six floors in the first tower by March 2011. Post this, NCC will be able to
demand milestone payments from customers. It has invested INR 500 mn recently in
addition to the INR 600 mn initial equity infusion.
Company Description
NCC is one of the largest construction players in India and undertakes civil construction
in segments such as transportation, water & irrigation, buildings, power, transmission
and distribution. The company has ventured into railways, oil & gas, and metals and has
also entered the Middle East where it currently undertakes works in roads, buildings, and
water segments. NCC is also one of the large players in the asset development space,
with a portfolio of 11 BOT projects spread across roads, power and airports. It also has a
land bank of 529 acres spread across Hyderabad, Bangalore and Chennai.
Investment Theme
NCC is a well diversified player in the construction space. Given that NCC has built
capabilities across various verticals of infrastructure, a slowdown in one vertical will not
deter its growth as it can always take orders in other verticals. NCC also has a portfolio
of 9 BOT projects—five roads, three power, and one convention center. These projects
are expected to be value accretive in the long term. Moreover NCC has a total land bank
of 529 acres—444 acres (under NCC Urban Infra (80% owned by NCC) and 85 acres
under NCC Vizag Urban Infra (95% owned by NCC). The land bank is spread across
Hyderabad, Bangalore and Chennai. Even though the company has put on hold its
development plans due to soft real estate market, these land holdings are expected to
result in significant value accretion as and when the real estate market improves.
Key Risks
Threat of equity dilution: The company’s venture into the BOT and real estate
segments will demand upfront investments with returns being back-ended. Though the
company has pruned its real estate plans considerably, its plans to set up BOT projects
will need funding in the future, possibly leading to a rise in leverage.
Decrease in government spending could affect order intake: Although we believe
the thrust on infrastructure spending by the government will continue, given that public
sector finances are getting stretched, any decrease in spending could affect order intake
and growth assumptions. Even though NCC is a well-diversified player and is to that
extent insulated by order intake risks to any particular vertical, overall decrease in
spending could have a bearing on its growth prospects.
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