The Hindu Business Line : Nagarjuna Construction: Buy

A 79-per cent growth in post-tax earnings annually over the past three years is a reflection of Nagarjuna Construction's (Nagarjuna) strong capability to exploit emerging opportunities. Riding on the domestic investment stream in roads and irrigation projects, Nagarjuna has transformed its identity from a building contractor to a well-diversified infrastructure player. The current order book further strengthens the case for sustained earnings growth.

At the current market price, the stock trades at 16 times its likely earnings for FY08 and is at a discount to some of its diversified peers. The valuations can be expected to get more attractive once the company covers more ground in its real estate venture and overseas projects. Nagarjuna's current order book at over Rs 6,500 crore is 3.4 times its FY06 revenues. The company has so far had an order book execution cycle of 1.5-2 years. This adds high visibility to earnings over the next couple of years.

Nagarjuna has overcome its lack of experience in roads until a few years ago to become a leading player in the national highway-building projects. The company is well placed to retain its stronghold in the build-operate-transfer (BOT) space - a strategy which increasingly appears to be the way forward for road projects at the State and Central level.

While transportation and building structures could continue to dominate the revenue stream, we expect the real estate and impending gas pipeline division to contribute more actively in the next couple of years. In the real estate segment, Nagarjuna has a healthy land bank in tier-II cities and has plans to set up a wholly owned subsidiary for the same. The current projects at Jharkhand and Andhra Pradesh may act as reference points for the company's expansion in this segment.

Nagarjuna's operating and net profit margins have expanded on a Q-on-Q basis at a time when its peers have started to feel the margin pressure. Increasing order accumulation may, however, force the company to go for sub-contracting to ensure timely execution, which in turn may add to pressures on operating margins. The new Model Concession Agreement being formulated, suggests a cap on the toll price increase. This may have a negative impact on toll-based BOT projects that the company undertakes.

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