Cruising merrily on the infrastructure highway

POUNDWISE

Nagarjuna Construction is sitting on a healthy order book of Rs 5,428 crore, which is three times its FY06 revenues.

Diversification has its merits. And, infrastructure major, Nagarjuna Construction Company (NCC) seems to have understood this well.

The Rs 1,850 crore company has spread its wings across a wide spectrum of the engineering and construction space to partly shield itself from the unfavourable changes in the business environment and capitalise on capex cycles in different sub-sectors.

This Hyderabad-based company is actually sitting on top of a potential goldmine with the state government taking keen interest in the development of the irrigation sector.

In addition to this, NCC's focus on the lucrative Build-Own-Operate-Transfer (BOOT) projects and efforts to increase its base in the overseas market apart from its foray into the real estate and hydropower segment are likely to keep the company growing profitably.

The 25-year old NCC covers the gamut of infrastructure activities from roads, bridges, industrial structures, water supply systems and irrigation to property development and even electrical transmission.

The business contributors are its five major verticals""roads and bridges (45 per cent), water (25 per cent), industrial structures (14 per cent), irrigation (11 per cent) and electrical transmission (4 per cent).

Focus on irrigation and roads

The Andhra Pradesh government envisages an investment of Rs 10,000 crore in the irrigation projects for fiscal 2007. Over the next five years, Indian irrigation sector will see investments worth Rs 46,000 crore.

NCC's irrigation segment had orders worth Rs 595 crore at the end of fiscal 2006 and is currently bidding to pocket a sizable chunk of new projects.

The Indian roads segment is likely to see an investment to the tune of Rs 60,000 crore on rural connectivity projects over the next three years. Backed by a good track record and project execution capabilities, NCC garnered orders worth Rs 2,334 crore as on March 2006 in this segment.

BOOT focus

However in future, BOOT projects could be the key growth drivers for NCC's business. The company is cautiously increasing its share in the BOOT projects which offer margins of about 8 to 10 per cent and are controlled risk models.

"No doubt BOOT projects have high payoffs but there could be some concerns specially for NCC being relatively new to these projects. Only timely commencement and completion within the planned costs can ensure profits," says Deepak Jasani, head of retail research, HDFC Securities.

Backed by funds

The company raised $120 million (Rs 540 crore) through the GDR issue and an increased capital base will enable it to bid for major projects on a independent basis rather than the consortium model followed earlier.

NCC has orders worth Rs 5,428 crore in its kitty that comes to almost three times the FY06 revenues and provides good earnings visibility for a couple of years.

NCC, in joint ventures with other players, has bagged major road projects like Bangalore-Mysore project (Rs 250 crore), Meerut-Muzzafarnagar project (Rs 530 crore), Orai-Bhognipur project (Rs 520 crore) and Himachal Sorang Power project (Rs 499 crore). NCC expects to pocket orders worth Rs 4,300 crore in fiscal 2007.

Targeting real estate and power

Though real estate is not a major focus area, NCC plans to enter into property development with a project in Bangalore. Out of 130 acres, 80 is under development of which 60 will be utilised for mass housing and the balance for commercial purposes. NCC has also bagged a Rs 276 crore housing complex project from the Jharkhand government at Ranchi for the National Games in 2007.

Analysts opine that being a relatively new entrant the company may take a couple of years before it can take into account the real estate segment as a significant revenue contributor. A report by Edelweiss Securities estimates NCC's FY08 real estate revenues at Rs 300 crore.

NCC has recently forayed into the hydropower business sensing an opportunity from the need to generate 50,000 MW through hydel power.

Moreover it is also extending its activities to overseas markets with near term focus on the Gulf region. NCC's joint venture has bagged a Rs 116 crore contract from the Muscat Municipality, Oman.

Sound financials

NCC has delivered consistent financial performance backed by efficient management and shorter execution time. In fiscal 2006, except for the second quarter when overall sector margins declined, NCC has reported much better quarterly growth numbers as compared to other diversified players.

In FY06, sales have jumped by 54.85 per cent at Rs 1,840.44 crore. The operating profit has increased by a stunning 80.87 per cent to Rs 164.07 crore and margins have improved by 128 basis points to 8.91 per cent. The net profit registered a rise of 81.42 per cent to Rs 103.9 crore and margins leapt by 83 basis points to 5.65 per cent.

At the current market price of Rs 202.4, the stock trades at a 20 times it FY06 earnings as against competitors like Gammon India (24.5 times), HCC(18 times), IVRCL(20 times) and Madhucon Projects(22).

The forward P/E multiples are 12.5 and 8.25 times the FY07 and FY08 earnings respectively. "A diversified order book, steadily improving margins and valuations make it a attractive pick. At around Rs 180 levels NCC would be a definite buy," adds Jasani.