Nagarjuna Const: Sept outperformer

Order book has swelled by Rs 1,765 crore from Rs 7,455 crore in June-end.

In the past month, Nagarjuna Construction has outperformed the market. It has gained 33 per cent while the Sensex has gone up only about 18 per cent.

Besides private equity firm Blackstone taking a 12 per cent plus stake in the company last month, its order book through September has swelled by Rs 1,765 crore from Rs 7,455 crore in June-end.

Of these, the Sail contract in consortium with South Korea's Posco for the engineering, procurement and construction of a blast furnace complex is valued at Rs 1,558 crore, of which Nagarjuna's share is Rs 1,100 crore.

This will be the largest blast furnace in India and is a step towards becoming an Engineering Procurement and Construction company from a construction player.

According to analysts, this move will bring better profitability. It is also trying to broadbase its revenues beyond the water and construction segments, and has added segments of power, oil and gas, and metals.

Other contracts include the construction of the Indian embassy in Kathmandu, bridges in Karnataka and construction in Satyam Computer's SEZ.

The money it has raised from Blackstone will be used to invest in build-operate-transfer projects and bid for larger contracts.

It already has stakes, ranging between 30 and 64 per cent in five toll roads, which is going to be a key business. The company along with its subsidiaries owns 530 acres in cities such as Bangalore, Hyderabad and Chennai.

The financials are improving. Its consolidated operating profit margin went up by 100 basis points y-o-y in FY07 to 9.9 per cent. In the June 2007 quarter, there was a 200 basis points y-o-y increase to 10.4 per cent. Consolidated operating income grew 60 per cent y-o-y in FY07.

Though there will be some reduction in earnings per share growth over the short-term due to the equity dilution, the long-term prospects are bright. The stock trades at about 20 times FY09 earnings, and can be an outperformer.

Core Projects: Learning curve

Core Projects and Technologies, an IT services company, has shifted its focus to education services through the inorganic route.

On Wednesday, Core Projects announced all-cash acquisitions of two education services providers: Azzurri Education in the UK and KC Management Group in the US.

The company, which was set up four years ago, had made four acquisitions in the areas of enterprise resource planning, logistics, e-governance and consulting, and education services, where it didn't have presence.

Its earlier acquisition, ECS Inc, had given Core Projects access to schools in six states in the US. With KC Management Group, Core will have access to another 10 US states. Azzurri, on the other hand, will give it access to over 1,000 schools in the UK.

In addition, a number of products will also be added to Core's portfolio, which it intends to leverage in the Indian markets through the government's education initiative, Sarva Shiksha Abhiyan. To achieve this, the company already has a joint venture in place with IL&FS' education arm for content.  The consideration for the two acquisitions amounts to $45 million (about Rs 180 crore), which is one time estimated FY08 sales of both these companies.  The acquisitions have been funded by the proceeds of FCCBs raised in May this year. The target companies have a track record of clocking net profit margins of around 12-15 per cent.  Core Projects plans to offshore a large part of work carried out abroad at its facilities in Navi Mumbai and Bangalore, which would further expand overall margins.  For Q1 FY08, the company more than doubled its top line from Rs 29 crore in FY06 to nearly Rs 62 crore in Q1 FY08. The company has enjoyed a net profit margin of over 20 per cent.  Of the $80 million that Core collected via FCCBs, it is still left with $15 million after the acquisition and infrastructure costs ($20 million). With an aggressive inorganic focus, and some cash in the bank, its prospects appear bright.  At Rs 196, the stock is valued at nearly 22 times estimated FY08 earnings. The two other education software players-Educomp and Everonn trade at over 85 times estimated FY08 earnings.