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Nagarjuna Construction: SWOT Analysis

Apr 19, 2010

Nagarjuna Construction Company (NCC) is one of the largest construction companies in terms of revenues. The company has presence across 12 states and 7 business verticals - Buildings & Housing (25% of the order book), Transportation (4%), Water & Environment (18%), Electrical (4%), Irrigation (11%), New Divisions (Power, Oil & Gas, Metals and Mining;16%) and International (22%). Internationally, NCC has presence in Oman & UAE. Key focus areas in international markets include Transportation, Buildings & Housing and Water & Sanitation. In terms of client composition - 18% of the orders come from the private sector, 60% from the government sector and the balance 22% from the International markets. NCC also has presence in BOT/BOOT type projects. Currently the company has 5 road and 3 power BOT projects under its portfolio. The company's real estate development projects are undertaken by NCC Urban Infrastructure Ltd (80% subsidiary of NCC). It currently has 17 projects under its roof with presence in 6 cities mostly in Southern India. Total land acreage is approximately 417 acres. We hereby do a SWOT analysis of the company and analyze what potential and risks lie ahead of the company.

Strengths
Diversified order book: NCC has diversified order book with presence across multiple verticals. This provides a unique hedge to the company in case of slowdown in orders from any particular segment.

Working capital cycle: Construction is a working capital intensive industry. It should be noted that NCC has one of the best working capital cycle in the industry after Simplex Infrastructure.

Healthy share of private contracts: Higher share of private contracts ensue higher margins as they are bagged on a negotiated basis. Private contracts also allow better working capital management.

Weakness
Slowdown in international operations: The recent slowdown in the construction activity in Middle East markets may impact the top-line of the company in the near term.

Exposure to Andhra Pradesh: Although the exposure to Andhra Pradesh is just 10% of the order book, (immaterial) the company faces execution issues haunting top-line.

Opportunities
New divisions: New divisions present a great opportunity for the company to cash in on the incremental business.

Transportation: NCC revenue share from the transportation segment has witnessed a secular decline from FY06. Considering the recent policy thrust on infrastructure and roads in particular, (the government plans to award highway projects in range of Rs 350 bn over the next 3 years) NCC has enough headroom to tap in on this laggard business.

Threats
Competition: The industry operates at wafer thin margins. Unviable bidding by competitors in order to just gain an entry into the business can impact the top-line of the company.

Weaker government finance: Weaker government finances can impact the order inflows of the company


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