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Vidya Bala

Focus on improving the road network is likely to ensure robust order-book.

SHAREHOLDERS can retain their holdings in the stock of Nagarjuna Construction. Business Line had recommended a buy on the stock 10 months ago at Rs 190. The stock has since risen four-fold. It now trades at a price-earnings multiple of about 20 times the FY-05 earnings and 15 times the expected FY-06 earnings based on the current order-book position.

The company's robust growth in order-book, a healthy revenue mix sourced from several segments, strong financials and bright industry prospects presage well for its earning's growth. There may be room for steady gains despite the sharp run up in the stock. When the stock begins to trade on an ex-stock split basis (proposed in the ratio of five shares of Rs 2 each for every share of Rs 10), it could attract enhanced interest.

Nagarjuna Construction's order-book position was over Rs 4,300 crore, as of April 2005 (3.6 times the FY-05 revenues), and covers revenues of at least the next couple of years comfortably. As there is likely to be accretion to the order-book, there is a high degree of clarity on revenue and earnings growth. About 20 per cent of the order-book comes from the Godavari lift irrigation project jointly bid with Hindustan Construction. Recently, it also bagged orders in Assam, Gujarat and Delhi. Once executed, these orders could be the launch pad for securing more orders in these States and also act as a positive factor for it to qualify independently for similar projects in other States as well.

The company has so far derived a substantial part of revenues from projects in the southern and western States. Nagarjuna Construction has a well-diversified business model as it undertakes construction contracts in several segments. Orders in transportation, water-related infrastructure, and industrial and commercial buildings are principal drivers of revenue growth. There has been a rising trend in the share of irrigation and water supply projects in order-book and revenues, which provide better margins. This is likely to compensate partially for the lower margins in contracts from the roads and highways sector.

The macro environment appears favourable. The thrust on infrastructure with a near-doubling of the Tenth Pan outlay, a dedicated and expanding source of funds for roads and highways, a two-fold increase in the outlay for irrigation projects and accelerated investment in urban infrastructure development under the `National Urban Renewal Mission' should provide opportunities for healthy growth in order-book and revenues. Funding commitments from multilateral agencies such as World Bank and Asian Development Bank are on the rise, offering smoother flow of funds. The public-private partnerships such as the build-operate-transfer model offer prospects for higher returns.

Nagarjuna Construction, which has pre-qualified for potential orders in most of these areas, appears well-placed to capitalise on this opportunity. The composition of its current order-book position indicates its ability to bid competitively in several segments; it has already taken advantage of the plethora of orders released in roads, irrigation and housing segments.

Nagarjuna Construction's operating margins are a tad lower vis-à-vis its peers. There was a marginal decline in FY-05 too. Stiff competition that could drive bid prices to lower and the possibility of higher input costs could affect profitability levels. The manifold increase in the order-book position over the past couple of years and the built-in price escalation clause for steel components in major orders such as the Godavari lift irrigation project, however, ease concerns on profitability.

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