Thursday, September 17, 2009


Fund raising to spur future growth.....

INR 3.67 bn raised through QIP issue
Nagarjuna Construction (NCC) has raised INR 3.67 bn through a QIP issue. It issued 27.7 mn shares at a price of INR 132.46 per share, resulting in a post issue dilution of 10.8%. The funds raised will primarily be used to meet working capital requirements for its contracting business as well as the equity commitment for NCC’s infrastructure development portfolio. The company’s debt: equity ratio was comfortable at 0.7x at FY09 end.

Funds raised to be utilised to boost future growth
The funds raised will aid growth in the contracting as well as asset ownership businesses. NCC has performed well on the order intake front in the current year; order intake stood at INR 27 bn in Q1FY10 and has surpassed INR 40 bn YTD (against INR 66 bn in FY09). We expect the company to overshoot its order intake guidance of INR 65 bn for FY10. This is likely to improve revenue visibility going forward. NCC has a portfolio of 11 BOT projects—five road, two hydropower, two airports, one port, and one convention center (apart from the Gautami power plant where the company has decided to sell its stake). Of these 11 projects, one is operational, five are in the development phase, and five have yet to achieve financial closure. The company is also bidding for the upcoming NHAI BOT project. It has been already shortlisted among the bidders for a couple of road BOT projects. The funds raised will help meet equity commitment for current as well as future projects.

Outlook and valuations: Growth prospects improve; upgrade to ‘BUY’
While the fund raising exercise will be EPS dilutive in FY10, it will be EPS neutral in FY11 with likely increase in execution (due to strong order intake) and savings on interest cost. We are revising our EPS estimates downwards by 5.3% and 0.3% for FY10 and FY11, respectively. At CMP of INR 134, the stock is trading at a P/E of 18.3x and 13.9x for FY10E and FY11E, respectively. Our sum-of-the-parts-based target price for the stock is INR 175, with BOT projects contributing INR 17 to valuations. We have valued real estate investments at book value.

We believe fund raising will help the company log a faster growth trajectory. Also,
improvement in the pace of road BOT project awards and improving economic outlook with government’s thrust on infra projects is likely to aid NCC, going forward. Hence, we are upgrading the stock to ‘BUY’ from ‘HOLD’ and rate it ‘Sector Performer’ on a relative return basis (refer rating page for details).