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Nagarjuna Constructions – BUY

October 26, 2007

We had an in depth and up to date coverage about Nagarjuna Constructions. Now we are raising the price target to Rs 350. Primary reason for the same is revisions in earnings estimates by -9% to +14% over FY08E-10E. Increasing target multiple for core business to 19x from 16x earlier due to a structural change in the business mix, and rolling forward our target basis to Sept. 09E from Mar. 09E.

Nagarjuna is expanding into newer areas like EPC for the metals and oil and gas sector. Nagarjuna, in a JV with POSCO E&C, recently won an Rs11bn blast furnace order from SAIL for IISCO. NCC Urban, the real estate arm of Nagarjuna, has a three-year plan for developing about 12.87mn sqft and targets revenues close to Rs24bn. Nagarjuna is also looking to expand into laying of oil and gas pipelines in India. It has entered in to a joint venture with Naftogas of the Ukraine. Nagarjuna will hold about 70% stake in the venture.

Sum of Parts Valuation of the Company:

  • Core Construction Business – 250 18x FY09 earnings
  • NCC Infrastructure Holdings – 24
  • NCC Urban Infrastructure – 58
  • Tishman project- 15
  • Investment in Gautami Power and Jubilee Hills – 4

Thus we arrive at a sum of parts valuation of Rs 350 for the stock and reiterate a BUY.

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