Angel - Nagarjuna Constructions

Angel Broking is bullish on Nagarjuna Construction and has recommended buy rating on the stock with the target price of Rs 201.

Angel Broking report on Nagarjuna Construction:

Investment Arguments

Fast emerging as diversified infrastructure behemoth:

We believe NCC is on track to emerge as a diversified infra heavyweight with about 20% of our sum-of-the-parts (SOTP) valuation coming from SPVs and real estate businesses. We believe NCC's new business model allows it to capitalise on the substantial infrastructure capex of around USD 350 billion mentioned in the XI five-year plan (FY2008-12).

Strong Order Book of 2.5x FY2007 Topline

NCC grew its order book at a strong CAGR of 61% over FY2005-07. The company's order backlog, currently at Rs 7,300 crore, comprises water and irrigation, transportation, buildings, etc. A strong order book gives higher visibility to the company's earnings over the next few years.

Aggressive strategy to bid for high-margin BOT/BOOT projects

BOT projects enjoy an IRR of 14-18%. Currently, BOT projects account for 10% of the total order book of NCC. We have valued NCC’s BOT projects using the DCF method, which works out to Rs 18.7 per share.

Realty to deliver real gains

NCC has total land bank of 529acres. A booming real estate sector is expected to percolate to construction as well, which is the core competency of NCC. We have valued NCC's real estate business at a net asset value (NAV) of Rs 20.6/share.

Valuation

At the CMP, the stock trades at 20.5x FY2008E, 15.9x FY2009E earnings. However, adjusting for the value of the BOT projects (Rs 18.7/share) and Real Estate (Rs 20.6/share), the stock trades at 15.5x FY2008E, 12.0x FY2009E earnings. Based on the SOTP methodology, we have arrived at a Target Price of Rs 201. We initiate coverage on the stock with a Buy recommendation.