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Nagarjuna Construction --------------------------------------------------- Maintain OUTPERFORM
3Q11 results disappointing; high working capital cycle, SPV investments key concerns
● NCC’s 3QFY11 recurring PAT at Rs444 mn declined 7% YoY and
was 12% below our estimates. Disappointment was mainly led by
miss in sales revenues of Rs1.98 bn impacted by 1) extended
monsoons (Rs730 mn), 2) payments delayed by 3-7 months for
work executed, mainly from AP (Rs850 mn), 3) delay in land
acquisition for NHAI project (Rs400 mn).
● The company made a one-time provision of Rs40 mn each during
2Q and 3Q11 towards likely tax liability of Rs150 mn from the
recent IT raid. Balance Rs70 mn of tax provision is likely to be
made during 4Q11. Reported PAT declined 15.5% YoY.
● Our key concerns are its stretched working capital cycle, now at
205 days versus 139 days (net of cash) during March 2010, and
high gearing mainly on SPV’s equity funding. NCC has also cut its
sales guidance by 10% from Rs57.5 bn (parent) and Rs73 bn
(consol) on lower order inflows and missed sales during 2Q/3Q.
● We cut EPS by 15-28% over FY11-13 and TP by 23% to Rs144 to
reflect high working capital, slowdown in order flows, rising
interest costs, high SPV investments. Maintain OUTPERFORM.
Expect high gearing to fund equity needs of Nelcast project
NCC has recently acquired 55% stake in 1.32 GW Nelcast power
project in Andhra Pradesh for an equity value of Rs1.5 bn (acquired at
50% premium to book value). As per the company, 1) the project has
the necessary approvals for land acquisition, environment clearances,
water etc., 2) the Ministry of Coal has accepted its request for transfer
of coal linkage from its erstwhile Sompet project to Nelcast, approval
is now pending with Coal India, 3) the estimated project cost is Rs70
bn, of which Rs52 bn is expected to be debt funded. Of this, PFC and
REC have already sanctioned loan of Rs32 bn, balance loan is
expected to be financed by ICICI Bank and SBI and 4) financial
closure of the project is expected to be complete by March 2011. Of
the total Rs9.5 bn of equity investment required to be made for NCC’s
stake, Rs3 bn is to be invested on financial closure by March 2011
(Rs1 bn invested so far). Company expects financing the balance
through internal accruals and equity issuance at its 100% subsidiary,
NCC Infra. We believe fund raising at current valuations looks unlikely,
implying funding needs would be met through higher gearing,
impacting core construction profits and stretch parent balance sheet.
Expect FY11 order inflows to be flat YoY, FY12 to be
boosted by power projects
We expect NCC to earn Rs77 bn of order inflows during FY11 (flat
YoY) – the company earned Rs55 bn of order inflows during 9M11,
72% of our FY11 estimates. We expect FY12 order inflows to increase
74% YoY at Rs134 bn mainly led by an EPC order from its Nelcast
power project (Rs45 bn), two pending orders from IPPs (Rs32 bn)
expected during 1QFY12 and internal road BoT projects expected to
be won during FY12.
Cut earnings by 15-28%, Target to Rs144. OUTPERFORM
We cut our earnings by 15-28% over FY11-13 led by NCC’s stretched
working capital cycle (net of cash), now at 205 days versus 139 days
during March 2010, rising cost of interest (increase by 200-300 bp
YTD FY11), slowdown in ordering activity, investments in SPV
projects (mainly the 1.32 GW Nelcast power project and expected win
in BoT road projects). However, given the sharp stock correction, we
believe valuations are now attractive. Maintain our OUTPERFORM
rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nagarjuna Construction --------------------------------------------------- Maintain OUTPERFORM
3Q11 results disappointing; high working capital cycle, SPV investments key concerns
● NCC’s 3QFY11 recurring PAT at Rs444 mn declined 7% YoY and
was 12% below our estimates. Disappointment was mainly led by
miss in sales revenues of Rs1.98 bn impacted by 1) extended
monsoons (Rs730 mn), 2) payments delayed by 3-7 months for
work executed, mainly from AP (Rs850 mn), 3) delay in land
acquisition for NHAI project (Rs400 mn).
● The company made a one-time provision of Rs40 mn each during
2Q and 3Q11 towards likely tax liability of Rs150 mn from the
recent IT raid. Balance Rs70 mn of tax provision is likely to be
made during 4Q11. Reported PAT declined 15.5% YoY.
● Our key concerns are its stretched working capital cycle, now at
205 days versus 139 days (net of cash) during March 2010, and
high gearing mainly on SPV’s equity funding. NCC has also cut its
sales guidance by 10% from Rs57.5 bn (parent) and Rs73 bn
(consol) on lower order inflows and missed sales during 2Q/3Q.
● We cut EPS by 15-28% over FY11-13 and TP by 23% to Rs144 to
reflect high working capital, slowdown in order flows, rising
interest costs, high SPV investments. Maintain OUTPERFORM.
Expect high gearing to fund equity needs of Nelcast project
NCC has recently acquired 55% stake in 1.32 GW Nelcast power
project in Andhra Pradesh for an equity value of Rs1.5 bn (acquired at
50% premium to book value). As per the company, 1) the project has
the necessary approvals for land acquisition, environment clearances,
water etc., 2) the Ministry of Coal has accepted its request for transfer
of coal linkage from its erstwhile Sompet project to Nelcast, approval
is now pending with Coal India, 3) the estimated project cost is Rs70
bn, of which Rs52 bn is expected to be debt funded. Of this, PFC and
REC have already sanctioned loan of Rs32 bn, balance loan is
expected to be financed by ICICI Bank and SBI and 4) financial
closure of the project is expected to be complete by March 2011. Of
the total Rs9.5 bn of equity investment required to be made for NCC’s
stake, Rs3 bn is to be invested on financial closure by March 2011
(Rs1 bn invested so far). Company expects financing the balance
through internal accruals and equity issuance at its 100% subsidiary,
NCC Infra. We believe fund raising at current valuations looks unlikely,
implying funding needs would be met through higher gearing,
impacting core construction profits and stretch parent balance sheet.
Expect FY11 order inflows to be flat YoY, FY12 to be
boosted by power projects
We expect NCC to earn Rs77 bn of order inflows during FY11 (flat
YoY) – the company earned Rs55 bn of order inflows during 9M11,
72% of our FY11 estimates. We expect FY12 order inflows to increase
74% YoY at Rs134 bn mainly led by an EPC order from its Nelcast
power project (Rs45 bn), two pending orders from IPPs (Rs32 bn)
expected during 1QFY12 and internal road BoT projects expected to
be won during FY12.
Cut earnings by 15-28%, Target to Rs144. OUTPERFORM
We cut our earnings by 15-28% over FY11-13 led by NCC’s stretched
working capital cycle (net of cash), now at 205 days versus 139 days
during March 2010, rising cost of interest (increase by 200-300 bp
YTD FY11), slowdown in ordering activity, investments in SPV
projects (mainly the 1.32 GW Nelcast power project and expected win
in BoT road projects). However, given the sharp stock correction, we
believe valuations are now attractive. Maintain our OUTPERFORM
rating on the stock.
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