Stock market Result Update on Nagarjuna Construction for 1QFY2012

Stock market Result Update on Nagarjuna Construction for 1QFY2012 with a Buy recommendation and a Target Price of `82 (12 months).

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 `1,141.5cr (`1,086.5cr), which was in-line with our expectation of `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 `23.3cr (`41.4cr), which was again pretty much in-line with our estimate of `25.3cr.

Outlook and valuation: The current o/s order book of NCCstands at `16,189cr, flat qoq, with order inflow of `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 `82.