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Nagarjuna Construction: Conference call extracts - Views on News from Equitymaster
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Nagarjuna Construction: Conference call extracts
Jun 10, 2010

Nagarjuna Construction Company (NCC) is one of the largest construction companies in India. The company has presence across 12 states and 7 business verticals - Buildings & Housing, Transportation, Water & Environment, Electrical, Irrigation, New Divisions (Power, Oil & Gas, Metals and Mining) and International. NCC also has presence in BOT/BOOT type of projects. Currently, the company has 5 road and 3 power BOT projects under its portfolio. The companyís real estate development projects are undertaken by NCC Urban Infrastructure Ltd (80% subsidiary of NCC). It currently has 17 projects in its kitty with presence in 6 cities, mostly in southern India. Total land acreage is approximately 417 acres.

Recently we attended 4QFY10 conference call of NCC. Here are our key takeaways.

The company ended the year exceptionally well with strong revenue growth in the last quarter of the fiscal. Revenues for the full year were Rs 47.7 bn and in line with managementís expectations. Order book at the end of the year stood at Rs 154 bn with strong order inflow during the year.

Going forward, management guides revenues of Rs 73 bn and Rs 58 bn in FY11 on a consolidated and standalone basis respectively. The international construction business should clock around Rs 11.5 bn in terms of revenues while Rs 3.5-3.6 bn of revenue inflow is expected from NCC Urban and NCC Infra in FY11. The company has disclosed a strong bidding pipeline of Rs 50-70 bn and has L1 status in projects worth Rs 30-40bn. This should enable healthy growth in order book and revenues going forward.

As far as the international business is concerned, work on the Dubai project is going slow and there has been no material development on the Oman project. Except for 7-8 projects, all projects of the company are progressing as per schedule, signifying modest execution delays. Going forward, the Muscat road project is expected to drive revenues in the international business.

Management expects margin expansion of 20-30 bps in the next year. This should not be a challenging task as commodity prices have cooled off from the peak. In addition, roughly 60-65% of the contracts have price variable clause, preventing margin erosion during a period of rising commodity prices. The situation in Andhra Pradesh is also improving with outstanding receivables declining. This should shorten the working capital cycle of the company.

As far as the BOT projects are concerned, all the 3 WIP road BOT projects are expected to be operational by year end. Bangalore elevated tollway, which was operational recently, is expected to fetch Rs 600 to Rs 650 m of toll revenues. Management anticipates revenues from road BOT projects to be in the range of Rs 2.6 to 2.8 bn once all the road projects become operational. The total equity invested in BOT projects stood at Rs 9.41 bn at the end of the year. Total debt and cash in the books stand at Rs 15 bn and Rs 2 bn respectively. Capex is expected to be in the range of Rs 1.5 bn and investments between Rs 9-10 bn for FY11.

We believe that it will not be challenging task for the company to achieve the set internal targets due to healthy order book, strong bidding pipeline and decline in commodity prices. Although the work on international construction business is not that encouraging, the company should be able to gather some speed once the situation improves globally. Progress on BOT projects was a positive surprise. Thus, overall the company should be able to paint a better picture in FY11.

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