>NAGARJUNA CONSTRUCTIONS: Strong order booking inflates guidance (RELIGARE)

Nagarjuna Constructions’ (NCC’s) Q3FY10 results were largely in line with our estimates. Topline grew 15.6% YoY to Rs 11.9bn while the EBITDA margin expanded 119bps on a 32% growth in adj. PAT growth to Rs 479mn. NCC has also increased the full-year guidance for order inflows to Rs 75-80bn from Rs 65bn previously due to robust order booking by the company (orders of Rs 66bn booked during 9MFY10). We maintain Buy on the stock but scale back our target price to Rs 184 from Rs 192 earlier.

Results in line: NCC’s net sales for Q3FY10 grew 15.6% YoY and 11.3% QoQ to Rs 11.9bn – largely in line with our estimates. The EBITDA margin expanded 119bps to 9.9%, 55bps above our estimate mainly due lower construction expenses (as a proportion of revenues). In line with the strong operating performance, NCC’s adj. grew 32% YoY and 9.9% QoQ to Rs 479mn. Consolidated order book at Rs 148.1bn: NCC ended Q3FY10 with an order book of Rs 148.1bn or 3.1x its FY10E revenues. The company has bagged orders worth Rs 19.7bn during the quarter and Rs 66bn during the year so far, surpassing the full-year order inflow guidance. Consequently, the management has revised its FY10 order inflow guidance from Rs 65bn to Rs 75-80bn. Since only a small proportion of its order backlog is from Andhra Pradesh (7.6% (11.3bn) of total order book), a state currently gripped with political conflicts, NCC is not likely to face any material execution delays.

Revenue guidance maintained at Rs 48bn: NCC has reported revenues of Rs 32.5bn for 9MFY10. For the full-year, the management has maintained its revenue guidance at Rs 48bn on a standalone basis and Rs 55bn on a consolidated basis; this implies an ambitious 35% revenue growth target on standalone basis for Q4FY10.

Power project update: NCC has plans to develop a 1,320MW thermal power plant at a total project cost of Rs 70bn (Rs 17bn equity and Rs 53bn debt). So far, it has invested Rs 500mn in the project. The company has already acquired land for the project and tied-up with Mahanadi coalfield for sourcing coal. NCC expects the project to attain financial closure by March ’10. The company intends to dilute up to 49% of its stake in this venture.

Maintain Buy: Currently, the stock trades at a P/E of 17.6x FY11 earnings. Exsubsidiary, it trades at 11.8x FY11 earnings. We prune our FY11 earnings estimates by 7.3% mainly on expectations of a 30bps dip in margins and increase in interest cost. We arrive at a SOTP target price of Rs 184 from Rs 192.

To read the full report: NAGARJUNA CONSTRUCTIONS

>HINDALCO (SMC)

Performance for the quarter ended December 2009
For Q3 FY10, the standalone net revenue of Hindalco increased 29% Y-o-Y and 8% sequentially on the back of higher metal volumes and better copper realisation. The capacity increases through the brown-field expansion have resulted in higher production as well as lower costs. However, the OPM was down 480 bps to 14.1% and the operating profit was down 4% Y-o-Y mainly on account of lower by-product credit in the copper business of Rs 100 crore and higher coal cost of Rs 50 crore. However, sequentially the operating profit was up 23%.

The revenue in aluminium business was lower 5% Y-o-Y at Rs 1885 crore with 17% lower PBIT at Rs 438 crore. The benefits of higher volume, improved geographic/ product mix and higher LME were partially offset by impact of stronger Rupee and increase in coal prices. The purchase cost of coal has increased steeply, impacting the margin.

In the copper business, revenues increased by 60% to Rs 3432 crore mainly on account of higher copper LME. The benefits of the marked improvement in operational efficiencies including energy efficiency were partially offset by lower by-product credit due to lower sulphuric acid realisation and fertilizer subsidy. These factors led to a PBIT of Rs 159 crore, 38% higher Y-o-Y.

With lower other income at Rs 50 crore on account of lower treasury corpus post repayment of the bridge loan taken for acquisition of the Novelis against Rs 150 crore in Q3 FY09, along with 22% lower interest cost at Rs 72.94 crore and higher effective tax rate (increased 400 bps to 23.3% while absolute tax expenses were flat at Rs 129.52 crore), the PAT ended 22% lower Yo- Y at Rs 427.10 crore. However, sequentially the PAT was up 24%.

With adoption of AS-30 on financial instruments relating to derivatives accounting, net gain / (loss) Rs (159) crore, Rs 110 crore and Rs (8) crore for the quarter ended December 2009 has been included under Net Sales, Consumption of Raw Materials and Other Expenditure, respectively.

To read the full report: HINDALCO

>GMR INFRASTRUCTURE LIMITED: FINANCIAL OVERVIEW

• AIRPORTS SEGMENT

• ENERGY SEGMENT

• HIGHWAYS & URBAN SEGMENTS

• CONSOLIDATED FINANCIAL PERFORMANCE

To read the full report: GMR INFRASTRUCTURE

>Ten for ’10: Top cyclical themes for 2010 (GOLDMAN SACHS)

Maintaining pro-cyclical bias in 2010 Our overall view of Asian cyclical stocks for 2010 is constructive, supported by our constructive view of the global/regional economies. Continuing growth in Asian economies is likely to be strengthened further by recovery in western economies. High operating leverage, boosted by structural cost reductions, is likely to boost earnings recovery as the cycle recovers. Our team is forecasting a 14% CAGR in sales over 2009-11 from the cyclical lows of 2009, helping a 53% growth in operating profit.

Key themes for 2010
There are three themes that underpin our regional stock picks: (1) bullish, out-of-consensus view on steel and lagging plays on commodities; (2) deeply discounted transportation sector; and (3) post-2H2009 rally, which stocks are not yet fully pricing in the expected recovery. That said, the margin for error has narrowed following the 2H2009 rally. A potential tightening in China may not change the underlying fundamentals, but could spook the markets. As such, stock-picking will become more important in 2010 and a stronger focus on valuations is warranted.

Our most actionable buys
Based on our 2010 themes, our ten best long ideas for 2010 are: Kawasaki Kisen, OOIL, EVA Air (all deeply discounted transportation stocks), JFE Steel, Kobe Steel, Yanzhou Coal, China Coal, China Shenhua (bullish metals/resources), GS E&C, IVRCL (valuations not yet pricing in recovery). We have also recently added FCC and THK to our Conviction Buy list; we also like JDC Moly, Itochu, Bajaj Auto, Wan Hai, Sumitomo Metal & Mining, and TSRC. These are all stocks that have a combination of company-specific attributes and attractive valuations – and stocks we would look to add to positions should there be any near-term weakness on perceived tightening in China and elsewhere.

Our least favorite ideas
We are cautious on selective machinery/capital goods names like Dongfang Elec, BHEL, Kawasaki Heavy; metal processors (Chalco, Nalco); auto suppliers (Cheng Shin Rubber, Toyota Boshoku); overvalued transport names (HMM, China Eastern); firms with uncertain outlook and generous valuations (Yunnan Chihong, Jiangxi Copper, Daewoo E&C).

To read the full report: ASIA CYCLICALS