Nagarjuna Construction Company

Current market price: Rs 115.60
Target Price: Rs 154
Upside: 33.2%
Brokerage: Angel Broking

Nagarjuna Construction Company (NCC) is set to emerge as a diversified infrastructure player with special purpose vehicles (SPV) and real estate. It is also foraying into the metals, oil & gas and power sectors. It has a strong order book of Rs 14,500 crore. High commodity prices, land acquisition issues leading to delays in execution are some concerns that the company faces.

NCC was expected to receive cash inflow to the tune of Rs 261 crore through warrants. NCC had allotted 25 lakh warrants (at Rs 217/share) in February 2007, to the promoters. In view of this, promoters paid 10 per cent upfront and subsequently failed to pay the remaining 90 per cent, leading the warrants to lapse.

There are good chances that the warrants issued to Blackstone (91 lakh warrants at Rs 225/share) in August 2007, also stand cancelled as they haven’t been converted so far and the approval from FIPB is still pending.

Thus, the company will go for higher debt instead of equity dilution. This can negatively impact earnings on account of prevailing high interest rate regime. The brokerage has pruned earnings estimates and EPS has been revised to Rs 7.5 (earlier Rs 8.6) and Rs 9.5 (earlier Rs 12.5) for FY09E and FY10E, respectively. The price target for the stock has been thereby reduced from Rs 189 to Rs 154.