Nagarjuna Construction - Rights Issue Fortifies Balance Sheet :: Edelweiss

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Nagarjuna Construction’s (NCC) ~INR6bn rights issue has been oversubscribed. The issue will strengthen the company’s balance sheet, with debt:equity likely to decline from 1.0x in FY14 to 0.5x by FY16E (and potentially to 0.3x after the power plant stake sale). We believe the deleveraging will make NCC the most compelling pick in the construction space, providing it with a war chest to take advantage of the upcoming opportunities in the infra space. Also, it will lead to multiple rerating as concerns about surging interest costs are allayed. Potential monetisation of road/power assets and interest rate cut are additional triggers.

Rights issue infuses ~INR6bn funds

NCC’s rights issue has been oversubscribed 1.14x. NCC will issue 299.3mn fresh shares as part of the rights issue, proceeds of which will be utilised for debt repayment.

Multiple benefits of deleveraging

Apart from the reduction in leverage, the rights issue entails other benefits as well. The debt build up had propelled NCC’s interest rate on working capital loans to 13.0-13.5% (~INR27bn overall debt at H1FY15 end) and fee on non-fund based facilities increasing to 1.5-2.25% (non fund based limits of ~INR70bn). The decline in debt level along with the expected improvement in credit rating will lower NCC’s interest rates. Also, a healthier balance sheet, a pre-requisite for successful bidding and execution of EPC contracts, will provide more comfort to investors, triggering multiple rerating.

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https://www.edelweiss.in/research/Nagarjuna-Construction--Rights-Issue-Fortifies-Balance-Sheet/27351.html