Nagarjuna Construction Company Ltd
CMP: Rs209 BUY
Nagarjuna Construction Company Ltd (NCC) to benefit from the high investment in road and water verticals, expected to together account for 35.6% of revenues in FY07 and 19.5% in FY08. The current order book at 3.4x FY06 turnover is healthy, given NCC’s average execution period of 27 months. With order intake during FY06 at 2x turnover, NCC is set for high growth in the next two years, with an expected topline increase of 54.5% and 43.5% during FY07 and FY08 respectively.
NCC was one of the early entrants into the BOT space and enjoys a good mix with two annuity road projects, two toll based ones and two projects in the power vertical. The company plans to bid for new BOTs on its own having raised the finances. At the book value of NCC’s equity, these six projects translate into Rs15.8 per share of NCC, which is 9% of the CMP.
NCC will sell 88% of the 50 acres land, in lieu of 12% of the developed area to be given to the government, post the National Games 2007. NCC also has 89% equity stake in the AP Housing project for development of 85 acres. We value these two projects at Rs9.1 per share of NCC at 2x book value of equity infused, comprising 5.2% of the CMP.
We also assign a value of Rs10.9 per share to the 130 acres land bank, over and above the two projects above, with a current market value of Rs3bn, post a 25% haircut. We foresee enormous value unlocking on the development and sale of these properties in future.
Prajay Engineers Syndicate Ltd
CMP: Rs280 BUY
IT offshoring and the resultant boom in hospitality business and premium residential segment has given a fillip to the Hyderabad real estate market. The expected new international airport at Shamshabad should give further increase to the commercial potential of the city. PESL being one of the leaders in the Hyderabad market is well placed to capture this high growth phase. We expect the company to report revenue and profit CAGR of 139% and 128% respectively over FY06-09. We value the stock at Rs307per share implying an upside potential of 49% from the current levels.
The ongoing IT outsourcing boom in the Hyderabad market, has led to a sharp rise in real estate demand for hotels and premium residential. This is corroborated in the sharp growth of more than 50% in property prices over the past 12 months. PESL with planned 15.8mn sq ft development offers a strong play on the growing Hyderabad real estate market.
PESL has a good mix of residential and hotel development over the next few years capturing both the booming segments. The company has altered its mass housing strategy to include luxury residential, citing increased demand from the IT/ITES sector. PESL also plans to develop two 5-star (one in Goa), two 3-star and expand its existing three star hotel.
PESL currently has 8 on hand projects and expects to take the tally to 31 over the next 4 years with a planned space addition of 15.8mn sq ft. we expect these projects to turn a revenue CAGR of 139% and a profit CAGR of 128% over the next 3 years. Hospitality business would start contributing meaningfully from FY10.
PESL’s ambitious plans can run into rough weather, if there is a sharp drop in property prices in the Hyderabad market. Also with many projects expected to start in a short span, delay in execution or launch could push back cash flows impacting valuations.
IVRCL Infrastructures & Projects Ltd. BUY CMP: Rs399
IVRCL is the biggest player in the water management vertical in India, accounting for 46% of the company’s revenues in FY06. With continued focus on this vertical by certain states, we expect this vertical to contribute to 50.5% of IVRCL’s turnover in FY07 and 53.1% in FY08. The award of India’s first desalination project to be constructed in Chennai, is testimony of IVRCL’s strong position in the segment. We assign a value of Rs6 per share to this project.
IVRCL’s 51.4% controlling stake in Hindustan Dorr-Oliver (HDO) enables access to HDO’s expertise to be leveraged for EPC projects in the water segment, completing the value chain in this segment. We include this investment in our target price calculations at the present market value of IVRCL’s equity of Rs1,640mn, translating into Rs13.7 per share.
IVRCL has a well diversified portfolio with an order backlog of Rs67bn at present, translating into 4.5x its FY06 sales, which is among the highest in the construction space. The order intake/execution is at a healthy 2.5x, signifying high growth in FY07 and FY08.
With three toll based road BOTs valued at Rs10.8bn, either having achieved or nearing financial closure, IVRCL plans to bid for some more and foray in BOTs in power T&D as well. We foresee IVRCL as a major player in the BOT space in future and value these three projects at Rs15.6 per share of IVRCL.
The sale of the balance 25% residential land in Hyderabad is expected to fetch Rs1.65bn in FY07. Around 40% of the 11.83 acres commercial portion is expected to be sold in FY08 and the balance in FY09. We value the commercial portion at the market price of unsold land post 25% discount, giving Rs29.7 per share of IVRCL.
Arihant Foundation and Housing Ltd. BUY CMP: Rs489
Chennai and its suburbs are fast turning into a hot spot for the IT/ITES sector. Skilled labour along with quality Grade A & B space is driving demand for real estate. Arihant Foundation and Housing Ltd (AFHL) with 2 IT Park projects and 15 residential projects in hand is well poised to benefit from the pick up in Chennai real estate demand. We expect the company to report 76% revenue and a 116% profit CAGR over F9/05-08 period respectively. We initiate coverage with a BUY rating and price target of Rs602.
Most IT companies have started setting up shop in tier II cities due to the dwindling cost competitiveness in tier I cities. Chennai offers them with quality grade A & B real estate with abundant skilled manpower. We expect Chennai to fast grow into the next outsourcing destination in line with Hyderabad and Pune.
With 17 in hand projects, AFHL is well poised to benefit from the growth in the property boom in the Chennai market. 15 of the 17 projects are residential in and around the Central Business District (CBD) and Old Mahabalipuram road (OMR), while the remaining 2 are IT parks in the upcoming Ambattur and OMR area.
The company is fast adding size and has planned two townships, one out of which is a 50:50 JV with a national developer. We view the company’s slow evolvement in bringing bigger projects in its fold as a positive sign towards revenue sustainability. We estimate revenue CAGR of 76% over F9/05-F9/08.
Most old projects with low gross margins (GM) are expected to get completed in F9/06. New projects would improve GMs by 500bps in F6/07 to 37%, which is still 5-7% lower than current prevalent. This would aid a profit CAGR of 116% over F9/05-F9/08.
A major portion of the future revenues, 27% in F9/07 and 65% in F9/08 are expected to come from new projects, which are either recently commenced or would be launched in the next 8-12 months. Delays in launch and execution, could impact profitability and there by valuations.
Patel Engineering Ltd.
CMP: Rs458 Market Performer
Patel Engineering Ltd (PEL), with a dominance in the hydropower segment (40.3% of its order book and 61.7% of revenues), commands a 22% share in this vertical. We estimate spend of Rs500bn on hydropower during the 10th and 11th plan. Maintaining its share would mean Rs10bn order flow (simple average) to PEL from this vertical each year, ensuring a comfortable position for the next 6-7 years.
PEL’s OPM at 12.9%, is one of the highest among peers on account of complexity of work in this vertical and capabilities that only a handful of players possess. We expect an increased share of hydropower in PEL’s order book (43.2%) in FY07, helping sustain margins.
PEL’s initiative, to move up the value chain by bidding for independent power projects in hydropower and lumpsum turnkey projects in the irrigation segment, is a value accretive one. PEL is awarded its maiden annuity project valued at Rs4.1bn, wherein its share is 60%. We assign a value of Rs8.2 per equity share of PEL to this annuity project, expecting an IRR of 12-14%.
PEL’s order book at Rs4.3bn translates into 4.2x FY06 turnover, offering visibility for a 3-year period. Order intake at 2.5x its FY06 consolidated revenues and the expected increase of 35% in order book in FY07 to drive growth.
PEL is fairly diversified and expected to witness a CAGR of 36.3% in turnover between FY06 and FY08. Its overseas subsidiaries and the recent acquisition in the urban infrastructure segment to add value going forward.
With an order book of 2.4x its current market capitalization, valuations appear attractive. We assign a MARKET PERFORMER rating