Nagarjuna Construction-Growth trajectory remains strong: Macquarie

Visit http://indiaer.blogspot.com/ for complete details �� ��


Nagarjuna Construction
Growth trajectory remains strong
Event
 NJCC posted 2Q FY11 results, which were above our estimates. Concerns
about poor execution were addressed, with revenues increasing 13% YoY to
Rs12bn and PAT increasing 5% to Rs0.46bn.
 We think key overhangs on the stock are liabilities from Sompeta thermal
power plant, Dubai real estate and tax liabilities from recent income tax raids.
We maintain our Outperform rating on the stock, but cut our target price to
Rs207 from Rs219.


Impact
 Execution to pick up further in 2H FY11, maintaining guidance:
Management is maintaining top-line guidance of Rs57bn, with a 10% margin
for the standalone entity for FY11.

Needs 26% revenue growth in 2H FY11 to meet guidance: We believe
NJCC needs to deliver revenue growth of 26% YoY (Rs44bn) in 2H FY11
vs 12% growth in 1H FY11 to meet guidance. Management is confident
about achieving this as it expects a pickup in execution.
 Order inflow guidance of Rs100bn achievable: NJCC garnered an order
inflow of Rs45bn over April-October 2010. Management appears confident
about achieving its order inflow guidance of Rs100bn as awards pick up in 2H
FY11. Order book grew 12% YoY to Rs160bn in 2Q FY11.

 Stable performance continues in overseas subsidiaries: Overseas
subsidiaries – NJCC Dubai and NJCC Muscat – continued to deliver good
results in 2Q FY11. NJCC expects to complete Dubai projects by Mar 2011.
Subsidiaries becoming material in overall operations: Of NJCC’s
guidance of Rs70bn consolidated top-line, it expects Rs13-14bn to come
from subsidiaries. Similarly, the company has invested Rs7bn and Rs5bn
as equity in real estate and BOT subsidiaries, respectively.

 Liabilities may total Rs1bn: We estimate that liabilities from a potential
write-off of the land investment in the Sompeta power plant and tax liabilities
will total Rs1bn (Rs500m each). The company was able to secure a one-year
extension for power supply to the Karnataka government in view of the recent
problem in environmental clearance at the Sompeta power plant.

Earnings and target price revision
 Reducing our FY11E EPS by 5% to account for a marginal cut in revenues.
We reduce our target price by 5% to Rs207 to reflect the same.
Price catalyst
 12-month price target: Rs207.00 based on a Sum of Parts methodology.
 Catalyst: Clarity on the power plant and a further pickup in execution.
Action and recommendation
 Stock still attractive at 10x FY12E EPS, maintain Outperform: We believe
that revenue growth and order inflow are likely to pick up during the rest of
FY11. We believe that the concerns about potential large write-offs are
unwarranted and that NJCC represents a compelling investment opportunity
at 10x FY12E EPS (adjusted for subsidiaries’ valuations). We maintain our
Outperform rating on the stock with a new target price of Rs207.