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Stock Recommendation | NAGARJUNA CONSTRUCTION COMPANY LTD – BUY – Target Price : 135
Publish date: NOVEMBER 15, 2018
NCC’s net profit for the quarter was ahead of our estimates led by better than expected execution and margins. Robust order book provides healthy visibility of future earnings and company maintains its revenue target of Rs 110 bn in FY19. Balance sheet is also much cleaner and company doesn’t expect any large provisioning on pending cases where arbitration is going on with the client.
■ Revenues for Q1FY19 stood well ahead of our estimates. Operating margins witnessed an improvement and company expects to maintain margins around these levels. Net profit performance stood ahead of our estimates led by higher margins and improved execution despite extra-ordinary provisioning pertaining to an overseas project arbitration.
■ Order inflow for the company stood healthy at Rs 41.9 bn during Q2FY19 taking the order book to Rs 329.5 bn. Healthy order inflows provide good visibility on revenue growth.
At Rs 87, stock is trading at 11.9x and 10.6x P/E and 6.5x and 5.5x EV/EBITDA on FY19 and FY20 estimates respectively. We maintain our estimates but reduce our valuation multiples to 15x versus 17x earlier to factor in delays in some projects and arbitration risks and arrive at a revised price target of Rs 135 based on sum of the parts valuation on FY20 estimates. (Rs 151 earlier). We maintain BUY recommendation on NCC Ltd. Key risk to our estimates and recommendation would come from adverse ruling on power project cases where arbitration is going on or delays in receivables.
Company’s revenues for Q2FY19 were ahead of our estimates. Order inflow had also been robust during the quarter and stood at Rs 41.9 bn taking the total order book to Rs 329.5 bn. Change in the accounting stand has led to additional revenue booking of Rs 2 bn in H1FY19 in the form of unbilled revenue.
Order book is diversified across roads, building, oil and gas (Rs 220 bn), water and railways (Rs 42.55 bn), irrigation (Rs 18.8 bn), electrical (Rs 23.94 bn), international (Rs 6 bn) and remaining contributed by mining, metals and power. However, with strong order book built through FY18, it expects an inflow of Rs 120-140 bn for FY19.
There are some delays being witnessed in project awarded by NBCC owing to ban on cutting of trees. Regarding NBCC project awarded to NCC, tree cutting was already done earlier by NBCC so execution should not get impacted. However, a government hearing is expected by 28th Nov and clearance should come by then. NCC had initially targeted Rs 7.5 bn revenues from this project during FY19 but since it has not yet commenced, the shortfall is likely to get compensated from other projects.
For AP projects, NCC is carrying out two types of projects – Affordable housing (from APTIDCO) and Capital city development project. Payments are on time from both these projects. Owing to elections in AP, if it sees delays in payments, then company may slow down on execution on these projects.
Better than expected order inflow and a robust order book provides healthy visibility of future earnings and company maintains its target to achieve Rs 110 bn of revenues in FY19. We also maintain our estimates and expect revenues to grow at a CAGR of 26% between FY18-20.
Operating margin for Q2FY19 stood at 11.76%, ahead of our estimates. We believe that operating margin is likely to remain strong going forward as new order inflows are coming at higher margins. We maintain our margin assumptions and expect operating margin of 10% going forward for the company.
Current debt stands at Rs 16.6 bn while consolidated debt stands at Rs 24.79 bn. Interest charges have moved up due to higher bank guarantee commission, higher interest on cash credit, working capital and mobilization advances. For FY19, capex is expected to be around Rs 2.5-3 bn.
Company has also raised an amount upto Rs 1.1 bn through issue of 9.2 convertible warrants at a price of Rs 119.4 per warrant to the promoters of the company. We currently do not factor in the conversion in our estimates as the current price is lesser than the conversion price and these warrants are likely to be converted after 18 months from the date of issue.
During the quarter, company has made a provision of Rs 475 mn towards adverse arbitration award in respect of a project undertaken by Dubai overseas subsidiary. This is related to a school project which NCC was executing.
In next 1-2 quarters, it is important to watch out for the developments on key cases under arbitration. Decision on Himachal Sorang case is likely to come by Dec, 2018-March 2019. During Q4FY18, NCC had lost an arbitration against TAQA, Abu-dhabi based utilities firm. Company had earlier sold its stake in 100MW hydro power project in Himachal Sorang to Taqa group and due to some dispute, an arbitration was going in a tribunal court in Singapore. NCC had already provided for Rs 1.15bn against the total disputed amount of Rs 1.5 bn. It believes that company has strong grounds to prove that no further provisioning will be required.
Development on Semcorp-Gayatri power project arbitration is also important as its outcome is expected by June 2019. NCC expects to recover the entire amount of Rs 7.5 bn from the client via arbitration project.
On real estate monetization, for Dubai Real estate project, NCC is in talks with a local developer to develop the project started by NCC. NCC is likely to get 1,60,000 sq ft of developed area after 2 years which will be worth Rs 2.7-2.8 bn as against its initial investment of Rs 2.25 bn in the project. On domestic project of Jubilee Hills and Telapur project, it expects to free up its investments and sell land parcels over next 1-2 years. Total real estate investment including Dubai currently stands at Rs 12 bn by NCC.
We maintain our estimates and expect net profits to grow at a CAGR of 31% between FY18-20.
At Rs 87, stock is trading at 11.9x and 10.6x P/E and 6.5x and 5.5x EV/EBITDA on FY19 and FY20 estimates respectively. We maintain our estimates but reduce our valuation multiples to 15x versus 17x earlier to factor in delays in some projects and arbitration risks and arrive at a revised price target of Rs 135 based on sum of the parts valuation on FY20 estimates. (Rs 151 earlier). We maintain BUY recommendation on NCC Ltd. Key risk to our estimates and recommendation would come from adverse ruling on power project cases where arbitration is going on or delays in receivables.
Nagarjuna Construction Company Limited (NCC), a construction and infrastructure company has evolved to a full-fledged infrastructure solutions provider. The Company's business divisions are categorized as Building & Housing, Transportation, Electrical, Water & Environment, Irrigation, International, Power, Metals and Oil & Gas Division.
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