Stock Review: Nagarjuna Construction

The satisfactory performance of Nagarjuna Construction Company (NCC) in the September quarter has come on a lower base. Revenues rose 13 per cent year-on-year (y-o-y) to `1,201 crore, as compared to 1.1 per cent y-o-y growth in the corresponding quarter a year ago. Operating profit margin was maintained at 10.3 per cent despite higher costs, while net profit margin came at 3.8 per cent due to a seven-fold rise in other income at `5.4 crore.

NCC witnessed a slowdown of 13 per cent in its order book at `16,075 crore.

However, the company has maintained its earlier guidance of order inflows (`10,000 crore), standalone sales (5,300 crore), consolidated sales ( 7,300 core) and operating profit margin (10-10.5 per cent).

Analysts don't seem to be too worried about sales and margin targets, but are cautious about the order inflow guidance, as NCC needs orders worth `5,500 crore in the remaining five months of 201011 ( `2,750 crore each in December and March quarters).

Also, if the government's decision regarding the environmental clearance for the 1,320-Mw venture (expected in a month) goes against the company, it will have to look for alternative locations in Andhra Pradesh, delaying the project. The company has invested `83 crore so far.

Investors also need to keenly track developments in the Dubai real estate project, as the West Asian economy is still not out of the woods. NCC has invested a total of `130 crore in both these projects.

Though the stock, at 152.45, trades at a reasonable 13 times 2011-12 estimated earnings (including value for build-operate-transfer and real estate projects), analysts are cautiously optimistic about the company's prospects.

Performance of the core business is stable, but concerns persist about exposure to international real estate and power projects