Nagarjuna Construction 1QFY2012 performance highlights and results update

August 23, 2011

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NCC posted moderate set of numbers for 1QFY2012. The company is facing headwinds like 1) increasing debt levels; 2) overall slowdown in order booking; and 3) delays in financial closure for its power plant. However, owing to its attractive valuations and diversified order book with exposure to most growth sectors, we maintain our Buy view on NCC.
Disappointing numbers, as expected: The company reported top-line growth of 5.1% yoy to Rs.1,141.5cr (Rs.1,086.5cr), which was in-line with our expectation of Rs.1,169.5cr. On the operating front, the company’s margin was marginally ahead of our estimate at 10.2% (9.7%). The company continues to reel under pressure on the earnings front on account of subdued top-line growth and burgeoning interest costs. The bottom line came in at Rs.23.3cr (Rs.41.4cr), which was again pretty much in-line with our estimate of Rs.25.3cr.
Outlook and valuation: The current o/s order book of NCC stands at Rs.16,189cr, flat qoq, with order inflow of Rs.1,349cr for 1QFY2012. Going ahead, we believe the order inflow would be driven by EPC work of its own power plant. However, earnings would continue to reel under pressure due to higher interest cost on the back of higher debt requirements to fund its investments in the power project and on potential winning of road BOT projects. We have downgraded the P/E multiple for the stock (from 10x earlier to 8x currently) in light of increased debt levels, gloomy macro environment and pressure on earnings growth in the near to medium term. However, at the current price, the stock is trading at attractive valuations (3.9x FY2013E earnings adjusted for its investments and subsidiaries) and at 0.5x FY2013E on P/BV basis (standalone). Hence, we maintain our Buy view on the stock with a revised target price of Rs.82.

Execution slows down once again
For 1QFY2012, NCC’s numbers were in-line with our estimates but were lower than street expectations. The company posted yoy growth of 5.1% on the top-line front at Rs.1,141.5cr (Rs.1,086.5cr), which was in-line with our expectation of Rs.1,169.5cr and street expectation of Rs.1,193.5cr. Muted revenue performance was due to lower order booking during the year and delayed payments from clients.
On the order booking front, the company faced a slowdown. The company bagged orders of mere Rs.1,349cr during the quarter. Going ahead, we believe the order inflow would be driven by EPC work of its own power plant.\

Net margin under severe pressure due to higher interest cost and subdued top-line growth
On the operating front, the company’s margin was marginally ahead of our estimates at 10.2% (9.7%). The company continues to reel under pressure on the earnings front on account of subdued top-line growth and burgeoning interest costs. The bottom line came in at Rs.23.3cr (Rs.41.4cr), which was again pretty much in-line with our estimate of Rs.25.3cr but was lower than street’s expectation of Rs.28.4cr.

Order book analysis
NCC’s order book, which stands at Rs.16,189cr (3.2x FY2011 revenue) as of 1QFY2012, is spread across nine verticals and the major contributors include the building, water and power segments. Going ahead, management expects the road, building and captive power segments to gather momentum and add significantly to the order book.

Change in estimates
Going ahead, we expect NCC’s interest cost to increase on the back of higher debt requirements to fund its investments in the power project and on potential winning of road BOT projects. Therefore, this will significantly impact the company’s bottom-line growth, given the limited cushion from top-line growth.

Outlook and valuation
The current o/s order book of NCC stands at Rs.16,189cr, flat qoq, with order inflow of Rs.1,349cr for 1QFY2012. Going ahead, we believe order inflow would be driven by EPC work of its own power plant. However, earnings would continue to reel under pressure due to higher interest cost on the back of higher debt requirements to fund its investments in the power project and on potential winning of road BOT projects.
We have downgraded the P/E multiple for the stock (from 10x earlier to 8x currently) in light of increased debt levels, gloomy macro environment and pressure on earnings growth in the near to medium term. However, at the current price, the stock is trading at attractive valuations (3.9x FY2013E earnings adjusted for its investments and subsidiaries) and at 0.5x FY2013E on P/BV basis (standalone). Hence, we maintain our Buy view on the stock with a revised target price of Rs.82.
We have valued NCC on an SOTP basis with a target price of Rs.82/share by assigning 8x FY2013E earnings (standalone). The company’s real estate venture has been valued on P/B basis and its BOT assets have been valued on DCF basis. Our target price implies an upside of ~50.8% from current levels. Hence, we maintain our Buy view on the stock with a revised target price of Rs.82.