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Tuesday, December 9, 2008

Nagarjuna Construction - Buy Report from Prabhudas Lilladher

Prabhudas Lilladher has upgraded the rating on Nagarjuna Construction Company Ltd to buy from accumulate.

The stock has seen a steep correction from its yearly highs, and a robust order book along with lower interest and commodity rates, makes it attractive at current levels.

At current market price at Rs 67 the stock is trading at 10 times FY09E and 7 times FY10E, bring it in-line with peer valuation, with positive surprises expected from order and EBIDTA front. The company is also now expected to limit on road BOTs reducing business risk.

Nagarjuna Construction has currently a robust order book of Rs 12,500 crore (Rs 4000 crore order intake in H1FY09) with an execution period of 30 months. Prabhudas believes that this order book will drive the FY09 and FY10 revenues at 28-30 per cent YoY with risk of delays being minimal.

The company has already posted sales of Rs 2,020 crore in H1FY09 which is expected to substantially (20% growth HoH) gear up during H2FY09. Although it has factored in the revenue growth from the robust order book, with robust order intake, cooling commodity prices and interest rate Prabhudas has further revised FY09E and FY10E upwards. The brokerage expects Nagarjuna Construction to post a 30 per cent CAGR in revenues from FY08-10E.

Cooling in commodity prices is expected to keep the EBIDTA margins close to 10 per cent with more cash contracts being in buildings and water segment. Also the company would be benefiting form the fixed price contracts forming nearly 15-20 per cent of the total order book in a present situation. However the real effect of commodity prices meltdown will be witnessed post Q4FY09. Nagarjuna Construction has also reduced its exposure to road BOTs and further intends to bid for only those projects which are expected to give good IRRs. To that extend equity commitment is expect to not further increase from parent level which will keep the debt levels under check. The company is also expected to reap fruits from diversified presence in oil & gas and power sector.

The company's dependence on debt funds in expected to reduce with ease in working capital and limited SPV investments. With a cut in Repo rate and CRR enough liquidity has been infused in the system which is expected to bring down the interest rates. Thus on account of these factors, the brokerage revises interest cost downwards by nearly 100 basis points.
Source: Economic Times

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