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Nagarjuna Construction disappoints in the Dec quarter

Nagarjuna Construction disappoints in the Dec quarter

Nagarjuna Construction Co. Ltd’s (NCC) financial results for the quarter ended 31 December disappointed the Street. But the bigger disappointment came from the management’s outlook for the current quarter and for the entire year.

NCC has indicated that the company is likely to miss its revenue guidance for FY11. It had initially given stand-alone revenue guidance of Rs5,750 crore for FY11 and consolidated revenue guidance stood at Rs7,300 core. At that guidance, the company would have had to make 40% year-on-year stand-alone revenue growth in the March quarter.

Also See Muted Outlook (PDF)

In the December quarter, stand-alone operating revenue increased by 12% over the same period last year to Rs1,335 crore. Normally, after monsoons, construction activity tends to pick up, but extended monsoons spoiled the party to some extent this time.

Operating profit margin fell by about 40 basis points to 9.5% from 9.9% in the December 2009 quarter, which is why operating profit grew at a slower pace of 8%. Net profit fell by 15% to Rs40 crore because of higher depreciation costs and interest expenses. Interest costs were higher on account of the deteriorating working capital scenario. One basis point is one-hundredth of a percentage point.

In fact, the company’s profitability in the September quarter was relatively better on the same kind of revenue growth. Operating margin was 10.2%, operating profit increased by 13% and net profit increased by 5%.

What came as a positive surprise was orders in the quarter, which stood at Rs2,740 crore. The year-to-date order inflows stand at Rs6,236 crore and the order book as on 31 December stood at Rs17,270 crore, which offers good revenue visibility.

Infrastructure stocks have not performed this fiscal so far and NCC’s stock is no exception. Its stock further fell by 6% to Rs104 a share on Friday post-results announcement on a day when the benchmark Sensex fell by 2%. True, valuations are cheaper at this time, but near-term outlook remains muted given rising interest rates.

Moreover, analysts are concerned about the funding for Nelcast Energy Corp. Ltd, wherein NCC acquired 55% during the quarter. “NCC needs to infuse further equity of Rs750 crore over the next three-four years (Rs150 crore in Q4 FY11), which could be issue given tightening cash flows in core construction business," wrote analysts from Edelweiss Securities Ltd in a post-results note.

Also, commodity prices are rising, which can put pressure on operating margins for all infrastructure companies.

Graphic by Ahmed Raza Khan/Mint

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