Nagarjuna Const: Margins contract

The Rs 3,472 crore Nagarjuna Construction’s order book was already fairly strong growing at 41 per cent in the June 2008 quarter to Rs 1,744 crore. Now it has bagged three new orders totalling Rs 474 crore, one from Engineers India Limited and the other two in Bangalore and Mysore. The Hyderabad-based firm hasn’t really had trouble getting business.

The top line for the June 2008 quarter showed a healthy growth to Rs 971 crore, an increase of 27.4 per cent y-o-y. However, what’s hurting the construction firm are employee, labour, construction and other costs. In the three months to June, despite a lower bill for raw materials as a percentage of sales, the rising expenses on other items dented the firm’s operating profit margin by nearly 100 basis points y-o-y to 9.4 per cent.

The rise in raw material prices is a significant concern since the company cannot pass on this increase for about 30 per cent of its orders, including road construction contracts and the Rs 742 crore blast furnace order from SAIL. Besides, all international orders are also negotiated at a fixed price, though some clients have agreed to absorb the increase in the prices of bitumen.

For the remaining 70 per cent of the orders, Nagarjuna can pass on cost increases, in some cases fully and in others partially. Of late, expenses on interest have risen sharply with the firm borrowing more to finance its working capital needs. That has hurt the bottom line—-the profit before tax actually fell one per cent, in the June 2008 quarter, to Rs 55 crore.

The stock has been a huge underperformer losing 65 per cent since the start of 2008 compared with a fall in the Sensex of around 30 per cent. With an order backlog at the end of June quarter of Rs 12,150 crore, the estimated revenues of Rs 4,300 crore for FY09 should come through unless there are execution delays. The growth in the earnings, however, would be far more subdued at around 7-8 per cent. That’s why the stock , which currently trades at 16.4 times its estimated FY09 earnings, appears to be somewhat expensive.