The Hindu Business Line : Nagarjuna Construction: Buy

Nagarjuna Construction (Nagarjuna) is well on its way to diversifying its business and, thereby, improving visibility for earnings growth. Investors can take exposure to the stock with a medium-term perspective. Improved profitability margins, healthy order-book and increased bidding capacity as a result of ramp-up in shareholder funds are likely to sustain the growth story over the next couple of years.

At the current market price, Nagarjuna trades at about 25 times its expected FY-07 earnings on a post-bonus issue (of one share for every share held) basis. This is at a premium to peers such as IVRCL Infrastructures and Hindustan Construction. We have not factored in revenue flows from BOT projects and forays into international markets. Significant contribution from these segments may see the company's stock trade on a par with industry majors.

Visibility from order-book

Nagarjuna's order-book is close to the Rs 6,000-crore mark and is likely to be converted to revenues over the next three years. The order-book offers clarity to earnings growth over the next couple of years. While the transportation segment continues to dominate the order-book position, irrigation and water and environment projects are beginning to play a significant role too. Higher margins from the latter have led to a 116-basis-point surge in the operating profit margin (OPM) to 8.9 per cent. Nagarjuna can derive comfort in margins through the high-value segments.

Expanding business

Over the past couple of years, the company has increased its participation in real-estate projects. Its ongoing National Games Village project in Jharkand and the agreement to develop residential houses for the Andhra Pradesh Housing Board indicate that this segment is set to expand.

Nagarjuna's land bank of 130 acres across the Bangalore, Mysore, Visakhapatnam and Chennai provide scope for more projects (market value of land has not been factored in the valuation).

Nagarjuna's recent consortium with ICICI Ventures and Maytas infrastructures for the development of star hotel, retail mall and commercial complex at Rs 800 crore could be the launch pad for the company's foray into the retail real-estate space.

The company may also have an advantage in this segment in the southern region, as the area still remains less penetrated by frontline real-estate developers.

While revenues from the stream may not be significant in the near future, we expect the same to emerge as a value-added business, given the company's strength in construction.

After remaining a domestic player for long, Nagarjuna has now decided to enhance its presence by entering the West Asian market. The company has opened offices in Dubai and Muscat and aims to procure roads, building and pipeline projects, on the back of domestic qualification in these areas.

A recent Rs 120-crore order from the Muscat Municipality for water pipeline projects could be the launch pad for securing more projects in the region.

Expanded net worth

Nagarjuna Construction has also ramped up its shareholder funds through issues of global depository receipts and is now well-placed to bid for large projects. This would mean securing full projects instead of sharing the revenues through a joint venture. The expansion in shareholder funds may accelerate revenue growth.

Nagarjuna's net profit margin has improved from the 4 per cent range to 5.7 per cent. This, however, is lower than that of Madhucon Projects and IVRCL. Some improvement may be on the cards with the company's plan to foray into gas pipeline business.

The company's intense activity in the BOT space may require regular infusion of cash and has the risk of affecting the core business. If its plan to carve a holding company for this purpose fructifies, the core business may be safeguarded.

More Stories on : Stocks | Recommendation | Infrastructure | Real Estate & Construction

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page