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NAGARJUNA CONSTRUCTION COMPANY (NCC)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.60 FY13E P/E: 17.8X
Result highlights: Revenues of the company were lower than our estimates
while operating margins were also impacted by higher costs and lower than
expected execution. Company posted net loss for the quarter and
profitability was impacted by high interest outgo and came much lower
than our estimates. Order inflow till now is lower than estimates. We
reduce our estimates and downgrade the stock to ACCUMULATE from BUY
earlier on the stock. We expect stock to underperform till order inflow,
execution ramps up and interest rates come down.
q Revenues declined by 5% YoY due to lower execution on account of lack
of order inflows, adverse macro-economic scenario of high interest rates
as well as labor unavailability.
q Operating margins stood at 6.1%, lower than our estimates. Company
has also lowered its full year operating margin guidance from 9.5-10%
earlier to 8.5% now.
q Earnings were impacted by higher interest outgo as well as lower than
expected execution and margins.
q We cut our FY12 and FY13 estimates to factor in poor performance witnessed
during 9MFY12. At current price, stock is trading at 17.8x P/E and
8.4x EV/EBITDA on FY13 estimates. Continued high interest rates coupled
with high working capital cycle during the fiscal has been impacting net
profit margins adversely for the company. We downgrade the stock to
ACCUMULATE from BUY earlier with a revised price target of Rs.60 (Rs.80
earlier)
Revenue growth lower than expectations
n Revenues declined by 5% YoY due to lower execution on account of lack of
order inflows, adverse macro-economic scenario of high interest rates as well as
labor unavailability.
n Company had earlier expected to overcome the shortfall in the revenues seen
during H1FY12 and expects standalone revenues to grow by 12% for the full
year FY12 to Rs 56 bn and consolidated revenues to grow to Rs 72 bn. Now due
to lower execution, it has lowered its revenue growth guidance to Rs 51 bn on
standalone basis and Rs 65 bn on consolidated basis.
n Order inflow during Q3FY12 stood at Rs 16.92 bn from buildings, transportation,
water and irrigation, electrical and other segments. Company had earlier given
the guidance of order inflow of Rs 90 bn during FY12. However, till 9MFY12,
order inflow of Rs 48bn has remained lower than estimates. After including order
inflow from 1320Mw power project, order inflow stood at Rs 99 bn. Current order
book of company stands at Rs219.9 bn diversified across roads (2%), water
(12%), buildings (30%), irrigation (9%), electrical (6%), oil and gas, mining and
railways (4%), international (8%) and power (30%).
n Revenues in Q3FY12 are diversified across roads (8%), water (17%), buildings
(35%), irrigation (3%), electrical (6%), oil and gas, mining and railways (4%),
international (16%) and power (6%).
n We cut our estimates and expect revenues to grow at a CAGR of 5.4% between
FY11-FY13.
Status of key road and power projects
n Brindavan Infrastructure road BOT Project is already operational
n Bangalore elevated tollway project has average toll collection of Rs 22 lakh per
day.
n Western UP tollway has received partial CoD and has commenced toll collection
and toll is around Rs 18 lakh per day.
n Pondicherry-Tindivaram has average toll collection of nearly Rs 5 lakh a day..
n Financial closure of 1320 MW Thermal Power Project at KrishnaPatnam, Nellore
Dist, Andhra Pradesh is achieved. Coal linkage for the project is tied up with
Coal India (70%) and remaining coal is expected to be secured from Indonesian
coal mines where company will be investing $10 mn to develop the mines. It has
already invested $2 mn. For PPA's, it had earlier signed agreement with
Karnataka government where company had emerged as L1 in Case 1 bidding.
But later it was cancelled by the government. Now it expects to sign PPA with
Andhra Pradesh government. Due to lack of PPA's, we continue to remain skeptical
about future growth scenario of this project.
Operating margins stood lower than our estimates
n Operating margins stood at 6.1%, lower than our estimates. Company has also
lowered its full year operating margin guidance from 9.5-10% earlier to 8.5%
now.
n Margins during the quarter were impacted by time and cost overrun in some of
the projects coupled with increase in direct costs. Company also made a provision
of Rs 150 mn during the quarter for administrative expenses which were
advances given to other parties and is now non-recoverable.
n We thus reduce our estimates and expect margins to be 8.5% going forward.
Continued high borrowings, high interest rates and lower than
expected margins resulted in net loss for the quarter
n NCC posted net loss for the quarter due to lower than expected revenue growth
and margins coupled with sharp increase in interest outgo.
n Working capital requirements also continue to remain high with high debtor days
since clients are not paying on time and suppliers are also not giving supplies on
credit basis. Thus overall working capital cycle has witnessed deterioration.
n NCC plans to bring down the debt levels by monetizing some of the road assets.
n We cut our estimates to factor in lower revenue growth and margins and expect
net profits to decline by 59% during FY12 and then grow by 33% during FY13.
We now expect net profits to be Rs.672 mn (Rs.1287 mn earlier) and Rs.895 mn
(Rs.1580 mn earlier) for FY12 & FY13 respectively.
Valuation and recommendation
n At current price, stock is trading at 17.8x P/E and 8.4x EV/EBITDA on FY13 estimates.
n Continued high interest rates coupled with high working capital cycle during the
fiscal has been impacting net profit margins adversely for the company. We cut
our FY12 and FY13 estimates to factor in poor performance witnessed during
9MFY12.
n We downgrade the stock to ACCUMULATE from BUY earlier with a revised price
target of Rs 60 (Rs 80 earlier).
n We believe that stock will underperform till order inflow, execution ramps up and
interest rates come down.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NAGARJUNA CONSTRUCTION COMPANY (NCC)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.60 FY13E P/E: 17.8X
Result highlights: Revenues of the company were lower than our estimates
while operating margins were also impacted by higher costs and lower than
expected execution. Company posted net loss for the quarter and
profitability was impacted by high interest outgo and came much lower
than our estimates. Order inflow till now is lower than estimates. We
reduce our estimates and downgrade the stock to ACCUMULATE from BUY
earlier on the stock. We expect stock to underperform till order inflow,
execution ramps up and interest rates come down.
q Revenues declined by 5% YoY due to lower execution on account of lack
of order inflows, adverse macro-economic scenario of high interest rates
as well as labor unavailability.
q Operating margins stood at 6.1%, lower than our estimates. Company
has also lowered its full year operating margin guidance from 9.5-10%
earlier to 8.5% now.
q Earnings were impacted by higher interest outgo as well as lower than
expected execution and margins.
q We cut our FY12 and FY13 estimates to factor in poor performance witnessed
during 9MFY12. At current price, stock is trading at 17.8x P/E and
8.4x EV/EBITDA on FY13 estimates. Continued high interest rates coupled
with high working capital cycle during the fiscal has been impacting net
profit margins adversely for the company. We downgrade the stock to
ACCUMULATE from BUY earlier with a revised price target of Rs.60 (Rs.80
earlier)
Revenue growth lower than expectations
n Revenues declined by 5% YoY due to lower execution on account of lack of
order inflows, adverse macro-economic scenario of high interest rates as well as
labor unavailability.
n Company had earlier expected to overcome the shortfall in the revenues seen
during H1FY12 and expects standalone revenues to grow by 12% for the full
year FY12 to Rs 56 bn and consolidated revenues to grow to Rs 72 bn. Now due
to lower execution, it has lowered its revenue growth guidance to Rs 51 bn on
standalone basis and Rs 65 bn on consolidated basis.
n Order inflow during Q3FY12 stood at Rs 16.92 bn from buildings, transportation,
water and irrigation, electrical and other segments. Company had earlier given
the guidance of order inflow of Rs 90 bn during FY12. However, till 9MFY12,
order inflow of Rs 48bn has remained lower than estimates. After including order
inflow from 1320Mw power project, order inflow stood at Rs 99 bn. Current order
book of company stands at Rs219.9 bn diversified across roads (2%), water
(12%), buildings (30%), irrigation (9%), electrical (6%), oil and gas, mining and
railways (4%), international (8%) and power (30%).
n Revenues in Q3FY12 are diversified across roads (8%), water (17%), buildings
(35%), irrigation (3%), electrical (6%), oil and gas, mining and railways (4%),
international (16%) and power (6%).
n We cut our estimates and expect revenues to grow at a CAGR of 5.4% between
FY11-FY13.
Status of key road and power projects
n Brindavan Infrastructure road BOT Project is already operational
n Bangalore elevated tollway project has average toll collection of Rs 22 lakh per
day.
n Western UP tollway has received partial CoD and has commenced toll collection
and toll is around Rs 18 lakh per day.
n Pondicherry-Tindivaram has average toll collection of nearly Rs 5 lakh a day..
n Financial closure of 1320 MW Thermal Power Project at KrishnaPatnam, Nellore
Dist, Andhra Pradesh is achieved. Coal linkage for the project is tied up with
Coal India (70%) and remaining coal is expected to be secured from Indonesian
coal mines where company will be investing $10 mn to develop the mines. It has
already invested $2 mn. For PPA's, it had earlier signed agreement with
Karnataka government where company had emerged as L1 in Case 1 bidding.
But later it was cancelled by the government. Now it expects to sign PPA with
Andhra Pradesh government. Due to lack of PPA's, we continue to remain skeptical
about future growth scenario of this project.
Operating margins stood lower than our estimates
n Operating margins stood at 6.1%, lower than our estimates. Company has also
lowered its full year operating margin guidance from 9.5-10% earlier to 8.5%
now.
n Margins during the quarter were impacted by time and cost overrun in some of
the projects coupled with increase in direct costs. Company also made a provision
of Rs 150 mn during the quarter for administrative expenses which were
advances given to other parties and is now non-recoverable.
n We thus reduce our estimates and expect margins to be 8.5% going forward.
Continued high borrowings, high interest rates and lower than
expected margins resulted in net loss for the quarter
n NCC posted net loss for the quarter due to lower than expected revenue growth
and margins coupled with sharp increase in interest outgo.
n Working capital requirements also continue to remain high with high debtor days
since clients are not paying on time and suppliers are also not giving supplies on
credit basis. Thus overall working capital cycle has witnessed deterioration.
n NCC plans to bring down the debt levels by monetizing some of the road assets.
n We cut our estimates to factor in lower revenue growth and margins and expect
net profits to decline by 59% during FY12 and then grow by 33% during FY13.
We now expect net profits to be Rs.672 mn (Rs.1287 mn earlier) and Rs.895 mn
(Rs.1580 mn earlier) for FY12 & FY13 respectively.
Valuation and recommendation
n At current price, stock is trading at 17.8x P/E and 8.4x EV/EBITDA on FY13 estimates.
n Continued high interest rates coupled with high working capital cycle during the
fiscal has been impacting net profit margins adversely for the company. We cut
our FY12 and FY13 estimates to factor in poor performance witnessed during
9MFY12.
n We downgrade the stock to ACCUMULATE from BUY earlier with a revised price
target of Rs 60 (Rs 80 earlier).
n We believe that stock will underperform till order inflow, execution ramps up and
interest rates come down.
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