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Nagarjuna Construction + IVRCL Infra – The MidCap Saga on Street

December 25, 2009

The mid-cap construction space has underperformed the broader indices recently and is trading around 10x FY11E (adjusted for subs valuations) due to short-term irritants, despite we believe substantial growth opportunities beginning in FY11. Issues like the Dubai credit crisis and a separate statehood issue in Telangana have created a dampener on stock prices.

We expect order inflow in the infra space to strongly rebound in FY11 as governments get their acts together on sectors like roads, ports and continued push in power.

Nagarjuna Construction:
NCC’s strong order book position, focus on core operations (cash contracts, road BOT projects), 33% earnings CAGR over FY09-12e and attractive valuations makes it the top pick. NCC has re-focused on core strengths: cash-contracts and road BOT projects. It shelved two airport projects, capped further property investments and sold its stake in Gautami Power.

Earnings and Valuation – Macquarie expects an EPS of Rs 8.1 and 10.6 for FY10 and FY11 while Citi expects it to be Rs 7.7 and Rs 10 with SOTP valuation of Rs 195. Anand Rathi expects an EPS of Rs 9.3 and Rs 13.1 for FY10 and FY11 with a SOTP valuation of Rs231. All the Research estimates have Buy call.

Here is Motilal Oswal’s coverage on Nagarjuna Constructions.

IVRCL Infra:
Out of a total order book (OB) of ~Rs170bn, Rs50bn of orders are from the Andhra Pradesh (AP) irrigation dept. Discussions with management suggest that execution of projects is on track so far, with payments being received on time. The execution of Rs18bn worth of projects may be delayed / stopped if Central funding is not available to the AP government for these projects. Revenue growth could come under pressure as execution of these projects may get delayed. On the balance sheet side, the company has Rs1.56bn as receivables from AP irrigation dept currently of which IVRCL’s exposure is at Rs460mn.

However, in Long Term not all Analysts share the same saga. The Hindustan Dorr Oliver acquisition has proven value accretive for IVRCL: the former is better positioned in design engineering and complements the latter’s civil and structural capabilities.

Also, the company is the lowest bidder in a further Rs44bn of new orders. The company is also looking to aggressively participate in the road sector with awards likely by the end of FY10.

Citi expects IVRCL Infra to earn an EPS of Rs 17.13 and Rs 20.25 for FY10 and FY11 with SOTP valuation at Rs 390 while Anand Rathi expects it to earn Rs 17.5 and Rs 24.5 for FY10 and FY11, with SOTP valuation of Rs 480 [post-restructuring of IVR prime and Hind Dorr Oliver Holdings] Macquarie quite bullish on this space also reports SOTP valuation on IVRCL Infra at Rs 453.

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