Company Review: Nagarjuna Construction

Nagarjuna Construction Company’s (NCC’s) Q1FY10 revenue of Rs10 billion (+3% y-o-y) was lower than our estimate of Rs11.5 billion (+18.1% y-o-y).

EBITDA of Rs1 billion was in line with our estimate and net profit of Rs382 million (+3.1% y-o-y) was lower than our estimate of Rs457 million (+23.2% y-o-y).

Lower-than-expected revenue was mainly because of slower execution in the election period and lower orders in FY09 (~Rs46b vs Rs76b in FY08).

EBITDA margins rose 90bp y-o-y to 10.3% (v/s our estimate of 9%) mainly due to a favorable business mix and lower commodities prices.

NCC’s Q1FY10 order intake was Rs28.7 billion and its order book was Rs139 billion (+14% y-o-y). International order book was stagnant q-o-q, contributing Rs30 billion (22% of total) in the quarter.

Orders in the quarter were dominated by buildings, power/oil & gas and irrigation sectors. In Q1FY10 NCC secured an order of Rs9 billion from KVK Nilachal Power Project for BOP works. This is a 1,050MW (3 X 350MW) project to be commissioned by 2012. NCC’s order book includes Rs10b of an in-house Dubai project.

Interest cost rose to Rs346 million (+45% y-o-y, +63% q-o-q), higher than our estimate of Rs213 million. This is due to higher debt of Rs14.2 billion (+1.7b q-o-q) and other financial costs. We understand that non-fund based costs like bank guarantees rose.

Working capital rose Rs0.9 billion and NCC invested Rs1b in BOT/RE projects. NCC approved sale of 9.5% stake in Gautami Power to GVK for Rs1.1b (the cost to NCC is Rs630m).

Outlook

The management has given FY10 revenue guidance of Rs48 billion (16% y-o-y) and Rs55 billion (+15% y-o-y) for standalone and the consolidated entity, respectively. Order intake in FY10 is expected to be Rs65 billion. During Q1FY10 the company achieved 43% of its targeted order intake.

After the results we have revised our earnings downward by 3% for FY10. We now expect NCC to report net profit of Rs1.9 billion in FY10 (+26% y-o-y) and Rs2.4 billion (+24.8% y-o-y) in FY11.

At CMP, the stock quotes at reported PER of 17.5x FY10 earnings of Rs8.5 and 14.2x FY11E earnings of Rs10.5. Our SOTP based target price is Rs174, maintain BUY rating.