UBS recommends BUY Nagarjuna, IVRCL

Nagarjuna, IVRCL: Strong growth visibility,
attractive valuations
􀂄 Strong growth visibility: order backlog is ~2.5x FY11E revenues
Both Nagarjuna and IVRCL have strong growth visibility of over 2.5yrs (order
book/1-yr forward revenues). This is set to increase further in our view, as we
expect ordering in infrastructure segment to remain robust (Please refer our report
‘India Infrastructure: Next five years—bigger and better’ dated 10 June 2010).
􀂄 We forecast ~20% revenue growth with stable margins (~10% ) in FY11
We believe revenue growth of 20%+ is achievable over FY10-12E given large and
diversified order backlogs. Revenue growth has been over 20% in the past, except
FY10 (when execution was impacted by various issues like elections and problems
in the state of Andhra Pradesh). We expect EBITDA margins to remain stable at
FY10 levels of ~10% (the general trend over the past few years has been of
increase in margins with increase in visibility).
􀂄 Stocks have underperformed the market by over 25% in last 3 months
Nagarjuna/IVRCL has underperformed the market by 29/26% over last 3 months.
Though construction activity does get impacted during the rainy season (monsoons
have been good this year), we expect a strong pick-up in execution in H2FY11.
􀂄 Attractive valuations: Buy Nagarjuna (PT Rs210) and IVRCL (PT Rs200)
Core business of Nagarjuna/IVRCL (adjusting CMP for 1) BOTs/Real estate at BV
and 2) listed subs at 20% holdco discount to market price) is trading at 10/8x
FY12E earnings of construction business (we expect EPS to grow ~18% over
FY10-12E).