Nagarjuna Constructions - Company Analysis

Business of the Company

The Hyderabad based company engages in construction contracts in varied segments like transportation, water related infrastructure, industrial buildings, turnkey projects, townships, Industrial structures, transmission lines and commercial buildings. The sector that it operates in is showing tremendous growth and the company is also benefiting from the same. Infrastructure spending is likely to go up with all policy makers realizing that this is a major hindrance to the country’s fast growth. In line with this thinking the infrastructure spend is going to be twice the amount it was in the tenth plan. This would translate into spending on highways, roads, irrigation projects and investment in urban infrastructure. The company operates in various segments and this reduces the risk to a large extent. A recent development has been the increase in the share of irrigation projects in the total turnover. These projects are more profitable than the road construction projects and thus help to protect the margins from declining. However even if some decline in margin were to be there going forward the company needs to look at revenue growth. Since there are funding commitments from various international bodies like the World Bank and the Asian Development Bank and therefore these will be the drivers in the growth going forward.

Financials

The company is poised to take advantage of this and already has an order book position of Rs.4300 crore, which in itself is over 3.5 times Fiscal 2005 Revenues.
The Revenues have grown from 758 crores in fiscal 04 to 1188 crores in fiscal 05 and the EPS has grown from 32.47 to 42.91. A large part of the revenue i.e. 20% of the revenue is contributed from the Godavari Lift irrigation project. This order has been jointly bid with Hindustan Construction and recently the company has also bagged orders in states like Gujarat, Assam and Delhi. This has both its positives and negatives because such the operating margin in such a project is higher than other road construction projects but too much of the revenues are coming from a single project making the company dependent on that particular project. The company is entering into many new states and once it executes some projects successfully they can bid independently for those types of similar projects.

Road going forward

Since the company engages into various types of projects, successful execution means that they can pre qualify for potential orders in the same areas and to that extent the company seems well placed to take advantage of the growth in India’s infrastructure sector. The competition is likely to get intense going forward with bigger companies like Hindustan Construction and IVRCL in the fray. However the growth in the size of the pie is likely to be bigger. The company trades at around a P/E multiple of 13 which is reasonable and declines in the market should be used to buy into the stock. The stock is also going to be split in five shares of Rs. 2 each and then the liquidity is likely to improve.