ICICI Securities Limited

Result Update
February 7, 2011
Rating matrix
Rating Target Target Period Potential Upside : : : : Add | 110 12-15 months 6%

Nagarjuna Construction (NAGCON)

| 104
WHATS CHANGED
PRICE TARGET ..................................................................Changed from | 199 to | 110
FY11E 5267.0 513.1 185.1 FY12E 6402.4 617.2 208.5

Financial performance
| crore Net sales EBITDA Net profit FY09 4151.4 374.7 155.1 FY10 4777.8 484.4 192.3

EPS (FY11E) ........................................................................Changed from | 9.2 to | 7.2 EPS (FY12E) ......................................................................Changed from | 12.3 to | 8.1 Rating ......................................................................... Changed from Strong Buy to Add

Valuation summary
EPS (|) Adj PE(x) Adj Target PE(x) EV/EBITDA(x) P/BV(x) RoNW(%) RoCE(%) FY09 6.8 10.2 12.0 10.1 1.4 9.5 11.9 FY10 7.5 7.6 10.8 8.3 1.2 11.8 12.9 FY11E 7.2 9.6 11.3 9.6 1.1 7.9 10.3 FY12E 8.1 8.5 10.0 8.7 1.0 8.3 10.4

Rising debt level to restrict earnings growth

Nagarjuna Construction Cos (NCC) Q3FY11 results were disappointing on account of slippages seen due to i) extended monsoons, ii) delay in release of payment and iii) procedural delays in getting clearances and approvals for projects. With the management pruning down the FY11E guidance by 9-10%, rising debt level and further equity commitment towards the Nelcast power project, NCCs core business growth would be restricted (4.1% CAGR) during FY10-FY12E. Nonetheless, we recommend ADD rating on the stock only on account of the fact that it is trading at attractive valuation of 8.5x FY12 adjusted P/E and 1x P/BV. Q3FY11 result below expectations; guidance pruned NCCs Q3FY11 revenues grew 12.7% to | 1,334.1 crore, below our expectation of | 1,445 crore on account of adverse weather and delays in receivables and approvals. The EBITDA margin declined 60 bps sequentially to 9.5% due to these slippages. This coupled with higher tax expenses (on account of provision for IT raids and rising interest expenses due to rising debt level) led to a 15% YoY decline in the net profit. Furthermore, the management has guided a 9-10% slippage in its standalone revenue guidance of | 5,750 crore. Stretching balance sheet to restrict earnings growth NCCs net debt to equity has risen to 0.94x in 9MFY11 vs. ~0.7x in FY10 on account of rising debt level to fund its rising WC requirement. We believe NCCs net debt to equity will rise to 1.1x in FY12E on account of rising WC requirement and to fund its equity commitment towards the Nelcast power project acquisition (NCC has invested | 150 crore and is looking to invest ~ | 1,000 crore over the next few years).

Stock data
MCap Debt Cash EV 52 week H/L Equity capital Face value DII Holding (%) FII Holding (%) | 2,677 crore | 2,319 crore | 100 crore | 4,896 crore | 198/102 | 51 crore | 2.0 18.9 35.4

Price movement
200 170 140 110 80 50 Aug-10 Oct-10 Dec-10 Jun-10 Feb-10 Feb-11 Apr-10 (|) 6,600 5,800 5,000 4,200 3,400 2,600

Valuation
At the CMP, the stock is trading at 8.5x adjusted FY12E PE and 1x FY12 P/BV. We recommend ADD rating on the stock with a price target of | 110.
Exhibit 1: Key financials (standalone)
| crore Net sales EBITDA EBITDA Margin (%) Depreciation Interest PAT Q3FY11 1334.1 126.2 9.5 17.5 43.8 40.4 Q3FY11E 1445.3 143.7 9.9 17.6 46.4 53.3 Q3FY10 1187.0 118.1 9.9 13.3 30.6 47.9 Q2FY11 1198.6 120.6 10.1 16.8 37.5 46.0 YoY Gr (%) 12.4 6.9 31.5 43.3 -15.5 QoQ Gr (%) 11.3 4.7 3.8 17.0 -12.1

NCC

Nifty (RHS)

Analysts name
Deepak Purswani deepak.purswani@icicisecurities.com Bhupendra Tiwary bhupendra.tiwary@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

ICICI Securities Limited

Q3FY11 disappoints; revenues, bottomline slippages seen NCC reported a disappointing topline of | 1,334 crore as against our expectation of | 1,445 crore on account of i) extended monsoons, ii) delay in release of payment and iii) procedural delays in getting clearances and approvals for projects. The company has estimated a revenue slippage of | 195 crore in Q3FY11 on account of the above-mentioned impediments
NCC reported disappointing Q3FY11 results on account of i) extended monsoons, ii) delay in release of payments and iii) procedural delays in getting clearances and approvals for projects

NCC took a hit of ~60 bps QoQ to report an EBITDA margin of 9.5% in Q3FY11 as the impact of these hurdles passed through to the margins The reported PAT at | 40.4 crore also saw a slippage of ~ | 22 crore on account of delays in payments and clearances. NCC had also provided for provision of | 4 crore in Q3FY11 on account of expected tax liability of | 15 crore. Having provided for | 8 crore in Q2FY11 and Q3FY11, the company will provide for further | 7 crore in Q4FY11E The company also pruned down its earlier topline guidance by 910% for FY11E on account of the slippages seen in 9MFY11 Strong order book; order inflow guidance maintained NCC secured orders worth | 2,741 crore in Q3FY11 (| 6,236 crore YTD) to close the order book at | 17,269 crore at the end of the quarter. The management has maintained its order inflow guidance of | 10,000 crore in FY11E The management has indicated that that it expects to bag two IPP EPC orders worth ~ | 3,000 crore in Q4FY11 apart from the | 4,500 EPC order book from the Nelcast power project NCCs exposure to the troublesome AP region is ~7%, mainly in irrigation projects with ~ | 130 crore outstanding receivables in Q3FY11 (up from | 30 crore in Q2FY11)
Exhibit 2: Order book strong, execution pick-up awaited
17,600 (| crore) 13,200 8,800 4,400 0 Q3FY10 Order Book (| crore)
Source: Company, ICICIdirect.com Research

14,814 3.4

15,370 3.2

16,051 3.3

16,075 3.2

17,269 3.4

3.6 3.2 2.8 2.4 2.0 (x)

NCC secured orders worth | 2,741 crore in Q3FY11 (| 6,236 crore YTD) to close the order book at | 17,269 crore at the end of the quarter

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Order inflow (| crore)

Order book-to-bill ratio (RHS)

Exhibit 3: Buildings, international and new divisions contribute ~69% of order book
International 15% New Divisions 19% Irrigation 10%Electrical 3%
Source: Company, ICICIdirect.com Research

Buildings 35%

Transportation Water 5% 13%

ICICIdirect.com | Equity Research

Page 2

ICICI Securities Limited

Acquisition of 55% stake in Nelcast Energy During the quarter, NCC through its subsidiary NCC Power Projects picked up a 55% equity stake of Nelcast Energy Corporation Ltd (NECL), which is developing a 1,320 MW thermal power project at Krishnapatnam for | 150 crore with Gayatri Project having a 45% stake.
The total project cost is ~| 7,000 with debt to equity in the ratio of 3:1. NCCs share of equity contribution is ~| 1,000 crore over four years

The total project cost is ~ | 7000 with debt to equity in the ratio of 3:1. NCCs share of equity contribution was ~ | 1,000 crore over four years. The company is in the process of financial closure (FC) for the project and would require ~ | 150 crore of additional equity infusion for FC. While NCC has applied for transfer of the Sompeta project coal linkages to the Krishnapatnam plant, there are concerns from the environment activists alleging increase in pollution through domestic coal, which contains more of toxic waste leading to demand for revised MoEF clearance. Rising debt level to stretch balance sheet NCCs net debt to equity has risen to 0.94x in 9MFY11 vs. ~0.7x in FY10 on account of rising debt levels to fund its rising WC requirement. We expect NCCs net debt to equity to rise to 1.1x in FY12E further to fund its deteriorating working capital position and equity commitment towards the Nelcast power projects (NCC has invested | 150 crore and is looking to invest ~ | 1,000 crore over the next few years).
Exhibit 4: Net debt to equity trend
1.2 1.1 1.0 0.9 0.8 0.7 0.6 1.1 0.9 0.7 0.9 1.0

We expect NCCs net debt to equity to rise to 1.1x in position and equity commitment towards the Nelcast power projects

(x)

FY12E further to fund its deteriorating working capital

FY10

H1FY11

M9FY11

FY11E

FY12E

Source: Company, ICICIdirect.com Research

Other highlights The Bangalore elevated expressway (operational since April 2010) generated revenues of ~ | 17.5 lakh per day in Q3FY11 OB Infra and Western UP Tollways are expected to commence operation by March 2011 end while Pondicherry Tindivanam is expected to commence from April 2011 Himachal Sorang project is expected to go on line by December 2011
Exhibit 5: Performance of subsidiaries (M9FY11)
Subsidiary NCC Dubai NCC International (Muscat) NCC Urban Infra Turnover (| crore) 388.0 398.0 113.0 EBITDA Margin(%) 8.6 10.2 36.0 PAT Margin (%) 6.7 1.5 1.6

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Page 3

ICICI Securities Limited

Valuations
We have cut our EPS estimates by 25-35% for FY11E and FY12E in order to account for slower than expected revenue growth and higher interest expenses. The higher interest expenses are modelled in on account of i) rising interest rate level ii) rising debt level to fund its deteriorating WC requirement and equity commitment towards Nelcast power projects. Consequently, we now believe NCCs earnings would grow at a much lower CAGR of 4.1% during FY10-FY12E despite 15.8% CAGR in topline growth. Nonetheless, we recommend ADD rating on the stock on account of cheaper valuations. At the CMP, the stock is trading at 8.5x FY12E adjusted P/E and 1x FY12 P/BV. We have valued NCC at | 110 per share based on the SOTP valuation methodology. We now value it at 9x FY12 EPS vs. 12x FY12 EPS earlier on account of slower than expected growth in earnings. The real estate business is valued at 0.5x P/BV due to lack of clarity on NCC Harmony development. We also highlight that we have not assigned any value to its power business till the time it gets revised MoEF clearance.
Exhibit 6: SOTP Valuation - NCC
Entity
Our target price for NCC is | 110/share based on the SOTP methodology. The domestic and international construction business accounts for 66% and 14% of the target price, respectively.

Value (| crore) 2,271 1,877 395 351 9 141 30 78 93

Per share (| )

Comment

Construction Business Domestic International BOT Road Brindavan Infrastructure Bangalore Elevated OB Infra Western UP Expressway Pondicherry-Trindivanam

89 73 15 14 5.5 Value BOT projects based on FCFE metholdogy. We have assumed COE of 1.2 13% for Annuity & 14% for Toll based 3.0 projects. 3.6 value at 0.5x P/BV due to lack of clarity on NCC Harmony 0.3 9x FY12 Earning estimates 7x FY12 Earning estimates

Investment in real estate

213

Fair Value
Source: Company, ICICIdirect.com Research

110

Exhibit 7: Valuation metrics

Sales (| crore) FY09 FY10 FY11E FY12E 4151.4 4777.8 5267.0 6402.4 Sales Gr (%) 19.5 15.1 10.2 21.6 EPS (Rs) 6.8 7.5 7.2 8.1 EPS Gr (%) -4.7 10.6 -3.8 12.7 Adj P/E (x) 10.2 7.6 9.6 8.5 P/BV (x) 1.4 1.2 1.1 1.0 RoNW (%) 9.5 11.8 7.9 8.3 RoCE (%) 11.9 12.9 10.3 10.4

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Page 4

ICICI Securities Limited

ICICIdirect.com coverage universe (Construction)
Simplex Infra Idirect Code Mcap (| crore) SIMCON CMP 2295 Target % Upside Unity Infra Idirect Code Mcap (| crore) UNIINF CMP 822 Target % Upside IVRCL Infra Idirect Code Mcap (| crore) IVRINF CMP 1976 Target % Upside Nagarjuna Construction Idirect Code Mcap (| crore) NAGCON CMP 2677 Target % Upside Patel Engineering Idirect Code Mcap (| crore) PATEN CMP 1578 Target % Upside Hindustan Construction Idirect Code Mcap (| crore) HINCON CMP 2199 Target % Upside
Source: Company, ICICIdirect.com Research, UR* Under Review

Sales (| Crore) 346 549 59% FY09 FY10 FY11E FY12E 77 127 65% FY09 FY10 FY11E FY12E 74 161 118% FY09 FY10 FY11E FY12E 104 110 6% FY09 FY10 FY11E FY12E 226 454 101% FY09 FY10 FY11E FY12E 36 UR FY09 FY10 FY11E FY12E 4,662.7 4,443.5 5,182.9 6,406.5 Sales (| Crore) 1,130.8 1,476.8 1,801.0 2,055.0 Sales (| Crore) 4,867.9 5,477.1 6,037.9 7,703.8 Sales (| Crore) 4,151.4 4,777.8 5,267.0 6,402.4 Sales (| Crore) 2,459.8 3,190.9 3,430.2 4,195.2 Sales (| Crore) 3,313.7 3,644.2 4,125.1 5,006.4

EPS (|) 23.2 24.7 28.9 38.7 EPS (|) 10.4 11.7 14.3 15.9 EPS (|) 8.5 7.9 7.6 9.6 EPS (|) 6.8 7.5 7.2 8.1 EPS (|) 30.3 26.9 25.9 31.4 EPS (|) 1.7 1.6 1.4 1.5

Adj PE (x) 14.6 13.7 11.7 8.8 Adj PE (x) 7.4 6.6 5.4 4.8 Adj PE (x) 5.0 5.4 5.6 4.4 Adj PE (x) 10.2 7.6 9.6 8.5 Adj PE (x) 4.8 6.0 5.7 4.7 Adj PE (x) 8.6 9.8 9.9 8.6

P/BV(x) 1.9 1.8 1.6 1.4 P/BV(x) 1.4 1.2 1.0 0.9 P/BV(x) 1.5 1.4 1.3 1.2 P/BV(x) 1.4 1.2 1.1 1.0 P/BV(x) 1.5 1.3 1.2 1.0 P/BV(x) 2.1 1.7 1.6 1.6

RoNW (%) 13.9 13.1 13.9 16.1 RoNW (%) 18.0 17.6 17.3 16.5 RoNW (%) 13.2 11.5 10.5 11.9 RoNW (%) 9.5 11.8 7.9 8.3 RoNW (%) 20.8 17.0 13.4 14.4 RoNW (%) 12.5 6.5 5.3 5.8

RoCE (%) 14.7 12.8 14.2 16.8 RoCE (%) 18.8 17.6 16.9 16.7 RoCE (%) 12.8 14.4 12.5 13.2 RoCE (%) 11.9 12.9 10.3 10.4 RoCE (%) 13.4 14.6 12.2 13.1 RoCE (%) 10.5 9.5 8.6 9.5

Exhibit 8: Recommendation History

210 190 170 150 130 110 90 70 50 Aug-10 Nov-10 Jan-10 Mar-10 May-10 Dec-10 Sep-10 Jun-10 Jan-11 Feb-10 Jul-10 Apr-10 Apr-11 TP:199;Strong Buy

TP:199, Strong Buy

TP:110, ADD

NCC

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Page 5

ICICI Securities Limited

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor , Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Deepak Purswani MBA (FINANCE) Bhupendra Tiwary MBA (FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

pankaj.pandey@icicisecurities.com

Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Deepak Purswani MBA (FINANCE) Bhupendra Tiwary MBA (FINANCE) research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. It is confirmed that Deepak Purswani MBA (FINANCE) Bhupendra Tiwary MBA (FINANCE) research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICIdirect.com | Equity Research

Page 6