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Nagarjuna Construction Co. (NJCC)
Construction
Disappointing results marred by working cap. led balance sheet deterioration.
NJCC reported disappointing results with revenue and margins both below estimates.
Higher interest cost, depreciation and tax expense led to PAT decline of 15.5% (26.7%
below estimate) The management reduce aggressive revenues guidance by 10% in line
with estimate. Balance sheet deteriorates led by higher working capital and loans &
advances leading to higher debt levels (by Rs8 bn). Revise estimates, retain BUY.
Disappointing results, particularly at PAT level led by higher interest, depreciation and taxation
Nagarjuna reported standalone revenues of 13.4bn, 5.6% below our estimate of Rs14.1 bn. The
company cited execution delays in irrigation, water and electrification division. EBITDA margin
remained relatively flat on a yoy basis at 9.6%, about 20 bps below our estimates. Interest
expense increased 43% yoy because of higher interest rate (10%) and higher debt (Rs23.2 bn in
Dec-10). Higher depreciation and tax expense (additional tax provision of Rs40 mn in 3QFY11)
further added to margin pressure (full year tax raid impact quantified Rs150 mn). Net PAT of
Rs404 mn was down 15.5% yoy and 26.7% below our estimate of Rs471 mn.
Working capital deterioration, increasing debt and unfunded power project equity is the key worry
Nagarjuna has reported a strong increase in debt levels by about Rs8.5 bn to Rs23.2 bn at end-
Dec-2010 versus FY2010-end levels of Rs15.3 bn. The increased debt level was primarily to fund
the higher working capital requirements and investments, loans and advances in subsidiaries. Net
WCap of the company (excluding cash) has increased by Rs8.5 bn from end-FY2010 levels.
Irrigation and power execution seem slow; buildings is good
Nagarjuna’s backlog of Rs173 bn is led by a 33% share of buildings versus 25% in 9MFY10. Based
on 9M revenue of Rs44bn, irrigation’s contribution is 4% vs. its backlog share of 11%. Even
Power segment’s contribution at 3% is significantly lower than its 10% share in backlog (longer
execution time frame). Order backlog and revenues imply 9MFY11 order booking of Rs62 bn vs
our FY2011E estimate of Rs80 bn.
Revise estimates and target price to Rs160/share; retain BUY
We revise our estimates to Rs7.2 and Rs9.7 from Rs8.8 and Rs11.5 for FY2011E and FY2012E,
respectively led by lower execution, higher interest cost and depreciation. FY2011 earnings also
incorporate tax raid hit of Rs150 mn tax raid. We retain BUY with a target price of Rs160/share on
(1) relatively attractive valuations – about 7X FY2012E P/E), and (2) reasonably well diversified
backlog and visibility.
Disappointing results - broadly in line with estimates
Nagarjuna reported standalone revenues of Rs13.4 bn recording a moderate yoy growth of
12.5%, 5.6% below our estimate. EBITDA margin remained relatively flat on a yoy basis at
9.6%, about 20 bps below our estimates. Lower construction costs as a percentage of sales
led to a contribution margin expansion of about 90 bps yoy. This was offset by higher
employee expenses and other expenses as a percentage of sales. The higher interest expense,
depreciation and tax expense in 3QFY11 led to a net PAT –de-growth of 15.5% to Rs404
mn – 26.7% below our estimate of Rs552 mn. The management cited that the company has
made additional tax provisions of about Rs40 mn in this quarter and quantified full year
impact of on going tax investigation of Rs150 mn.
For the nine months ending December 31, 2010, NJCC reported net revenues of Rs36.2 bn,
up 11.3% yoy. EBITDA margin declined marginally by 40 bps to 9.8%, leading to a net PAT
of Rs1278 mn in 9MFY11, down 1,7% yoy from Rs1,300 mn in 9MFY10.
Execution delays adding to Nagarjuna’s woes
The company cited delays in (1) Irrigation projects in AP of 6-7 months delay leading to loss
of about 130 cr, (2) water and environment division project in Gujarat, (3) electrification
project delays -in UP and other areas . Road project delayed primarily on issue of land
acquisition. The problem is not only on cash contract projects but also for BOT assets. The
company quantified (1) adverse weather conditions (monsoons) impacted revenues by about
Rs7 mn in third quarter (Rs1.7 mn in 9MFY11), (2) delays in release of payments by clients’
further impacted revenues by Rs8.5 mn (Rs32.7 mn for 9MFY11) and (3) delays in clearance
and land acquisition resulted in loss of Rs4 mn in 3Q (Rs15 mn for 9MFY11).
On target in internal operations, concerns on domestic business
As compared to Rs12 bn international revenue target in FY11, Nagarjuna has achieved Rs8.6
bn achieved in 9MFY11. Dubai reported revenues of Rs3.9 bn at 8.6% EBITDA and PAT of
6.7%. Muscat reported revenues of Rs4 bn at 10.2% EBITDA and PAT of 1.5%. NCC Urban
did revenues of Rs1.1 bn at 36% EBITDA and PAT of 1.6%. The company recorded
international Inflows of 133 cr in 9MFY11.
Higher depreciation and interest cost causes de-growth in consolidated PAT
At the consolidated level the company reported a revenue growth of 9% yoy to Rs15.9 bn
in 3QFY11 versus Rs14.6 bn in 3QFY01. The subsidiary revenues were contributed by (1)
Rs430 bn from Nagarjuna Contracting Co. LLC in Dubai, (2) Rs1.7 bn from NCCL
International LLC in Muscat and (3) Rs138 mn revenues from NCC Urban Infrastructure Ltd.
Consolidated EBITDA margin expanded by about 50 bps yoy to 11% in 2QFY11 on account
of lower construction expenses as a percentage of sales (down 310 bps yoy) compensated
by higher employee cost. Margin expansion led to 13.8% growth in operating profit but
was negated by higher depreciation and interest cost leading to fall of 3.3% at the PAT level.
Management reduces FY11E guidance by 10%, in line with estimates
The management has reduced its earlier revenue guidance by 9-10% implying a value of
Rs52 bn at the standalone level and aboutRs65-66bn at the consolidated. We expect the
company to report revenues of Rs53.7 bn in FY2011E, up about 12.4% yoy. We build in
EBITDA margin of 9.7% in FY2011E l and tax rate of 38% leading to a net PAT of Rs1.85 bn,
down 3.4% yoy. Our full-year estimates imply a revenue growth requirement of about 15%
in 4QFY11E and a marginal EBITDA margin decline to 9.5% versus 10% recorded in 4QFY11.
Some deterioration in balance sheet led by higher working capital requirement
Nagarjuna has reported a strong increase in debt levels by about Rs8 bn to Rs23.2 bn at
end-Dec-2010 versus FY2010-end levels of Rs15.3 bn. The increased debt levels were
primarily to fund the higher working capital requirements. Net working capital of the
company (excluding cash) has increased by Rs11.2 bn from end-FY2010 levels primarily led
by higher loans and advances (increased by Rs6 bn since end-FY2010). The Sept-end loans &
advances of Rs24 bn was comprised of (1) Rs7 bn loans & advances towards subsidiaries
(from Rs4.3 bn at end-FY2010), (2) Rs7.4 bn advances to suppliers, sub-contractors and
others, (3) Rs6.3 bn retention money and (4) Rs2.5 bn as tax advances.
Nagarjuna paying instead of receiving premium for TPP; funding concerns worry
The management announced buying the Nelcast 1320 thermal power project with Gayatri
for Rs2.7bn with Nagarjuna having a 55% stake. Nagarjuna is buying the project with all
environment and coal linkage clearance and hence paying premium. The EPC contract for
the same would be finalized this month and the company is presently in talks with Chinese
equipment vendors.
Strong inflows in FY2011E so far; irrigation and power segment lagging
The company reported order inflows of Rs27.4 bn in 3QFY11, up 39% yoy leading to total
order inflows of about Rs62.4 bn in 9MFY11. We have built in order inflows of Rs75 bn for
the full year FY2011E. The order backlog at end-9MFY11 stood at Rs173 bn which provides
a revenue visibility of about 3.2 years based on forward four quarter revenues.
Buildings segment increasing contribution vs decline in irrigation and power
The order backlog is well diversified among several sectors with maximum contribution from
the buildings segment at 33% of the total backlog. The remaining backlog is well diversified
between international, water & environment, irrigation and other segments. Although the
order backlog of the company remains strong, we highlight slowdown in contribution for
irrigation and power segments. Revenue contribution of irrigation at 4% compares
unfavorably to its share in backlog of 11%. Similarly power has revenue share of 3% vs.
10% share in backlog although part of the imbalance is attributable to longer execution
time frame.
Comparison with order backlog of 9MFY10 suggests that share of buildings has increased to
35% in Dec-10 versus 25% a year ago. Share of International operations has decreased to
15% from 22% in Dec-09.
Reduce earnings estimates; reiterate BUY with a target price of Rs160
We have revised our earnings estimates to Rs7.2 and Rs9.7 from Rs8.8 and Rs11.5 for
FY2011E and FY2012E, respectively. We have reduced the revenue growth for FY11E to
11.3% from 15% to account for execution delays and increased the tax expense by Rs150
mn to quantify tax losses due to recent IT raids.
We have retained our SOTP-based target price to Rs160/share comprised of (1) standalone
construction business valuation of Rs97/share based on target P/E multiple of 10X Mar-12E
earnings (earlier multiple of 13 for Sep-11E), (2) Rs17/share from the international
construction subsidiaries based on 10X Mar-12E earnings (earlier multiple of13 for Sep-11E),
(3) Rs28/share contribution from book value of BOT projects, (3) Rs16/share from book value
of real estate investments.
We retain BUY with a target price of Rs160/share on (1) relatively attractive valuations –
about 7X FY2012E P/E), (2) reasonably well diversified backlog and visibility.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nagarjuna Construction Co. (NJCC)
Construction
Disappointing results marred by working cap. led balance sheet deterioration.
NJCC reported disappointing results with revenue and margins both below estimates.
Higher interest cost, depreciation and tax expense led to PAT decline of 15.5% (26.7%
below estimate) The management reduce aggressive revenues guidance by 10% in line
with estimate. Balance sheet deteriorates led by higher working capital and loans &
advances leading to higher debt levels (by Rs8 bn). Revise estimates, retain BUY.
Disappointing results, particularly at PAT level led by higher interest, depreciation and taxation
Nagarjuna reported standalone revenues of 13.4bn, 5.6% below our estimate of Rs14.1 bn. The
company cited execution delays in irrigation, water and electrification division. EBITDA margin
remained relatively flat on a yoy basis at 9.6%, about 20 bps below our estimates. Interest
expense increased 43% yoy because of higher interest rate (10%) and higher debt (Rs23.2 bn in
Dec-10). Higher depreciation and tax expense (additional tax provision of Rs40 mn in 3QFY11)
further added to margin pressure (full year tax raid impact quantified Rs150 mn). Net PAT of
Rs404 mn was down 15.5% yoy and 26.7% below our estimate of Rs471 mn.
Working capital deterioration, increasing debt and unfunded power project equity is the key worry
Nagarjuna has reported a strong increase in debt levels by about Rs8.5 bn to Rs23.2 bn at end-
Dec-2010 versus FY2010-end levels of Rs15.3 bn. The increased debt level was primarily to fund
the higher working capital requirements and investments, loans and advances in subsidiaries. Net
WCap of the company (excluding cash) has increased by Rs8.5 bn from end-FY2010 levels.
Irrigation and power execution seem slow; buildings is good
Nagarjuna’s backlog of Rs173 bn is led by a 33% share of buildings versus 25% in 9MFY10. Based
on 9M revenue of Rs44bn, irrigation’s contribution is 4% vs. its backlog share of 11%. Even
Power segment’s contribution at 3% is significantly lower than its 10% share in backlog (longer
execution time frame). Order backlog and revenues imply 9MFY11 order booking of Rs62 bn vs
our FY2011E estimate of Rs80 bn.
Revise estimates and target price to Rs160/share; retain BUY
We revise our estimates to Rs7.2 and Rs9.7 from Rs8.8 and Rs11.5 for FY2011E and FY2012E,
respectively led by lower execution, higher interest cost and depreciation. FY2011 earnings also
incorporate tax raid hit of Rs150 mn tax raid. We retain BUY with a target price of Rs160/share on
(1) relatively attractive valuations – about 7X FY2012E P/E), and (2) reasonably well diversified
backlog and visibility.
Disappointing results - broadly in line with estimates
Nagarjuna reported standalone revenues of Rs13.4 bn recording a moderate yoy growth of
12.5%, 5.6% below our estimate. EBITDA margin remained relatively flat on a yoy basis at
9.6%, about 20 bps below our estimates. Lower construction costs as a percentage of sales
led to a contribution margin expansion of about 90 bps yoy. This was offset by higher
employee expenses and other expenses as a percentage of sales. The higher interest expense,
depreciation and tax expense in 3QFY11 led to a net PAT –de-growth of 15.5% to Rs404
mn – 26.7% below our estimate of Rs552 mn. The management cited that the company has
made additional tax provisions of about Rs40 mn in this quarter and quantified full year
impact of on going tax investigation of Rs150 mn.
For the nine months ending December 31, 2010, NJCC reported net revenues of Rs36.2 bn,
up 11.3% yoy. EBITDA margin declined marginally by 40 bps to 9.8%, leading to a net PAT
of Rs1278 mn in 9MFY11, down 1,7% yoy from Rs1,300 mn in 9MFY10.
Execution delays adding to Nagarjuna’s woes
The company cited delays in (1) Irrigation projects in AP of 6-7 months delay leading to loss
of about 130 cr, (2) water and environment division project in Gujarat, (3) electrification
project delays -in UP and other areas . Road project delayed primarily on issue of land
acquisition. The problem is not only on cash contract projects but also for BOT assets. The
company quantified (1) adverse weather conditions (monsoons) impacted revenues by about
Rs7 mn in third quarter (Rs1.7 mn in 9MFY11), (2) delays in release of payments by clients’
further impacted revenues by Rs8.5 mn (Rs32.7 mn for 9MFY11) and (3) delays in clearance
and land acquisition resulted in loss of Rs4 mn in 3Q (Rs15 mn for 9MFY11).
On target in internal operations, concerns on domestic business
As compared to Rs12 bn international revenue target in FY11, Nagarjuna has achieved Rs8.6
bn achieved in 9MFY11. Dubai reported revenues of Rs3.9 bn at 8.6% EBITDA and PAT of
6.7%. Muscat reported revenues of Rs4 bn at 10.2% EBITDA and PAT of 1.5%. NCC Urban
did revenues of Rs1.1 bn at 36% EBITDA and PAT of 1.6%. The company recorded
international Inflows of 133 cr in 9MFY11.
Higher depreciation and interest cost causes de-growth in consolidated PAT
At the consolidated level the company reported a revenue growth of 9% yoy to Rs15.9 bn
in 3QFY11 versus Rs14.6 bn in 3QFY01. The subsidiary revenues were contributed by (1)
Rs430 bn from Nagarjuna Contracting Co. LLC in Dubai, (2) Rs1.7 bn from NCCL
International LLC in Muscat and (3) Rs138 mn revenues from NCC Urban Infrastructure Ltd.
Consolidated EBITDA margin expanded by about 50 bps yoy to 11% in 2QFY11 on account
of lower construction expenses as a percentage of sales (down 310 bps yoy) compensated
by higher employee cost. Margin expansion led to 13.8% growth in operating profit but
was negated by higher depreciation and interest cost leading to fall of 3.3% at the PAT level.
Management reduces FY11E guidance by 10%, in line with estimates
The management has reduced its earlier revenue guidance by 9-10% implying a value of
Rs52 bn at the standalone level and aboutRs65-66bn at the consolidated. We expect the
company to report revenues of Rs53.7 bn in FY2011E, up about 12.4% yoy. We build in
EBITDA margin of 9.7% in FY2011E l and tax rate of 38% leading to a net PAT of Rs1.85 bn,
down 3.4% yoy. Our full-year estimates imply a revenue growth requirement of about 15%
in 4QFY11E and a marginal EBITDA margin decline to 9.5% versus 10% recorded in 4QFY11.
Some deterioration in balance sheet led by higher working capital requirement
Nagarjuna has reported a strong increase in debt levels by about Rs8 bn to Rs23.2 bn at
end-Dec-2010 versus FY2010-end levels of Rs15.3 bn. The increased debt levels were
primarily to fund the higher working capital requirements. Net working capital of the
company (excluding cash) has increased by Rs11.2 bn from end-FY2010 levels primarily led
by higher loans and advances (increased by Rs6 bn since end-FY2010). The Sept-end loans &
advances of Rs24 bn was comprised of (1) Rs7 bn loans & advances towards subsidiaries
(from Rs4.3 bn at end-FY2010), (2) Rs7.4 bn advances to suppliers, sub-contractors and
others, (3) Rs6.3 bn retention money and (4) Rs2.5 bn as tax advances.
Nagarjuna paying instead of receiving premium for TPP; funding concerns worry
The management announced buying the Nelcast 1320 thermal power project with Gayatri
for Rs2.7bn with Nagarjuna having a 55% stake. Nagarjuna is buying the project with all
environment and coal linkage clearance and hence paying premium. The EPC contract for
the same would be finalized this month and the company is presently in talks with Chinese
equipment vendors.
Strong inflows in FY2011E so far; irrigation and power segment lagging
The company reported order inflows of Rs27.4 bn in 3QFY11, up 39% yoy leading to total
order inflows of about Rs62.4 bn in 9MFY11. We have built in order inflows of Rs75 bn for
the full year FY2011E. The order backlog at end-9MFY11 stood at Rs173 bn which provides
a revenue visibility of about 3.2 years based on forward four quarter revenues.
Buildings segment increasing contribution vs decline in irrigation and power
The order backlog is well diversified among several sectors with maximum contribution from
the buildings segment at 33% of the total backlog. The remaining backlog is well diversified
between international, water & environment, irrigation and other segments. Although the
order backlog of the company remains strong, we highlight slowdown in contribution for
irrigation and power segments. Revenue contribution of irrigation at 4% compares
unfavorably to its share in backlog of 11%. Similarly power has revenue share of 3% vs.
10% share in backlog although part of the imbalance is attributable to longer execution
time frame.
Comparison with order backlog of 9MFY10 suggests that share of buildings has increased to
35% in Dec-10 versus 25% a year ago. Share of International operations has decreased to
15% from 22% in Dec-09.
Reduce earnings estimates; reiterate BUY with a target price of Rs160
We have revised our earnings estimates to Rs7.2 and Rs9.7 from Rs8.8 and Rs11.5 for
FY2011E and FY2012E, respectively. We have reduced the revenue growth for FY11E to
11.3% from 15% to account for execution delays and increased the tax expense by Rs150
mn to quantify tax losses due to recent IT raids.
We have retained our SOTP-based target price to Rs160/share comprised of (1) standalone
construction business valuation of Rs97/share based on target P/E multiple of 10X Mar-12E
earnings (earlier multiple of 13 for Sep-11E), (2) Rs17/share from the international
construction subsidiaries based on 10X Mar-12E earnings (earlier multiple of13 for Sep-11E),
(3) Rs28/share contribution from book value of BOT projects, (3) Rs16/share from book value
of real estate investments.
We retain BUY with a target price of Rs160/share on (1) relatively attractive valuations –
about 7X FY2012E P/E), (2) reasonably well diversified backlog and visibility.
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