Nagarjuna Construction Company

Overview:

NCC was established in 1978 by Dr A.V.S. Raju. It is headquartered at Hyderabad with regional
offices spread across India. It has international operations in Muscat, Dubai and Oman. NCC
has operations spread across ten different segments.

NCC is the only construction company from India hailed as “Best under Billion” in Asia pacific by
Forbes Asia. It is ranked as fastest growing construction company by NICMAR. NCC has many
other awards to its merit in the construction segment.

NCC’s vision statement is “To be a world - class construction and infrastructure enterprise
committed to quality, timely completion, customer satisfaction, continuous learning and
enhancement of stakeholder's value.”

Blackstone group hold 9% and Rakesh Jhunjhunwala hold 6% (with his wife) along with big
names like HDFC, Bajaj, HSBC, Citi hold 2% to 5% of stake in NCC.

Divisions:

Lets look at the segments NCC operates in

Building & housing: Industrial building, commercial building, housing projects, IT parks,
hospitals and sports complex etc forms the portfolio for this segment. This segment contributes
28% to the total revenue. It has achieved 36% revenue growth yoy and has order book of Rs
25,570 million. There is net order book growth each year.

Water & environment: Water treatment plants, reservoirs, sewage pumping stations etc forms
the portfolio for this segment. NCC is willing to bag huge orders under JNNURM(Jawaharlal
Nehru National Urban Renewal Mission), bid for BOT (Build Operate and Transfer)etc. This
segment contributes 21% to total revenue with revenue growth of 14% and order book of Rs
25,530 million. NCC is expecting orders worth of Rs 2 billion in this fiscal year.

Transportation: Roads, highways, bridges and flyovers form the portfolio for this segment. This
segment forms 17% of total revenues and has 7% revenue growth. The order book stands at Rs
10,190 million. There is degrowth in the order book for this segment

International: This segment includes project outside India including roads, building and water
pipelines. This business segment contributes 27% to the total order book forming 17% of the
total revenue. The revenue growth of 165% is achieved YOY for this business segment through
the foreign subsidiary operates in Oman, Dubai, Muscat and Maurities. The total order book for
this segment stands at Rs 33,010 million

Irrigation: Dam projects, hydroelectric power projects, lift irrigation projects, gravity irrigation
projects etc form the portfolio for this segment. This segment forms 5% of the total order book
and 6% of total revenues. The revenue growth for this segment is 8%. NCC expects huge
projects coming from Gujarat, MP and Bihar. Projects worth Rs 300 billion are likely to be
offered from Bihar alone. The total order book for this segment stands at Rs 6,090 million

Electrical: Commissioning of transmission lines and substations, project electrification and

system improvement projects etc form portfolio for this segment. This segment contributes 5%
to the total order book and 5% to the total revenues. There is de-growth of -23% as far as this
business segment is concerned. The total order book stands at Rs 6,140 million. NCC is looking
for JV partner to supply underground cable because there is a huge demand to move ground
cables to underground.

Metals: EPC contracts in iron, steel aluminum, zinc, copper and lead form the portfolio for this
segment. This segment form 4% of total revenues of NCC.The total order book for this segment
stands at Rs 10,150 million. This one of the new business segment in which NCC jumped into.

Oil and Gas: Oil refinery modernization projects, oil and gas pipeline projects form the portfolio
for these projects. This business segment form 1% of total revenues and the order book stands
at Rs 170 million. This division was established in 2007-2008.

Power: EPC contracts in the power sector comprising BOP (balance of plant) works and
Hydropower projects form the portfolio for this segment. This segment forms 1% of total
revenue and has order book of Rs 1090 million.

Mining: Ferrous and non ferrous mining projects in public and private sector. This is a new
sector and no revenue has been realized yet.

Financials & Growth story:

NCC has a diversified business portfolio which helps them to mitigate risk of cyclical. It will be
bidding for large projects instead of small ones because in small projects the changes of price
decrease are more.

NCC has sales of Rs 40 billion and order book of around Rs 140 billion that gives it revenue
visibility till 2012. However, the operating profit margin stands at 7.81% in 2008-09 against 9.5%
in 2007-08. NCC has tried to reduce the input cost effect by engaging suppliers in long term
contracts to reduce price volatilities.

NCC raised Rs 1000 million through debentures route and also raised Rs 5 billion through QIP.
It plans to use these funds to retire debt of Rs 2.5 billion and use rest of the money for BOT
projects and augmentation of working capital. The reserves are at Rs 16.40 billion which is up
from Rs 15.21 billion.

The company’s inventories have gone up from Rs 5.49 billion to Rs 7.40 billion. The inventory
increase is because of increase in volume activity.

The fixed assets decreased from Rs 6.62 billion to Rs 6.23 billion mostly because sale of assets
worth of Rs 1.86 billion to buy new assets worth of Rs 1.47 billion. Thus net decrease of 0.39
billion Rs. This is little bit interesting. NCC sold assets for Rs 1.86 billion after depreciation and
bought assets worth of Rs 1.47 billion. Therefore the net assets added are negative. This gives
rise to two scenarios 1) NCC has reduced activity or has optimized the use of fixed assets 2)
has increased subcontracting. It is mentioned in the annual report that subcontracting expense
has increased from Rs 11,339 million to Rs 14,027 million. This may be the reason why NCC
has lowered fixed asset base.

Overheads comprising of salary and administrative expense increased from Rs 2.18 billion to
Rs 2.82 billion this was partly because of salary increase and partly due to increase in volume of
business. This creates a concern on the execution rate because with such a higher order book
NCC would require more people and that is not reflected in annual report.

It can be observed that suppliers are not offering credit and even NCC has reduced offering
credit to its client thus creating pressure on working capital management. NCC has concerns in
working capital management and I feel any shock in future as far as credit offering is concerned
will put NCC in a spot of bother. We get a proof of the same when we see account receivables,
which has reduced from Rs 5416 million to Rs 1915 million and accounts payables has reduced
from Rs 3827 million to Rs (38) million.

NCC has working capital demand loan of Rs 4003 million and cash credit of Rs 2267 million
which is considerably higher compared to 2007-2008 cash credit of Rs 1403 million and working
capital demand loan of Rs 3715. The working capital demand loan is a secured loan obtained
by hypothecation of various assets and guarantees from directors. The interest paid on working
capital demand loan and cash credit for the year 2008-2009 was Rs 709 million compared to Rs
337.37 million.

NCC by raising funds Rs 5 billion through QIP and Rs 1.2 billion by selling a stake in Gautami
power has tried to reduce the debt part because it is very likely that they will need credit facilities
in future to raise working capital funds. We can also observe as it increases it execution speed
the demand for working capital will escalate and working on BOT/BOOT projects will also sap
huge quantum of working capital.

The unsecured short term loan has doubled to Rs 3575 million in 2009-2010 compared to Rs
1750 million in 2008-2009.

The working capital requirement, secured and unsecured loans highlight one fact that NCC is
growing too fast. I feel the company is in mess as it needs to gets its operations in order
because with operating margin of 7.5% one can’t expect the company to be sustainable in long
run.

The operating cash flow for consolidated NCC stands at Rs (3430) million in 2008-2009
compared to Rs (1712) million in 2007-2008. and a free cash flow to the firm at Rs (5000)
million

There is reduction of net block for construction accessories from Rs 2935 million to Rs 2509
million and reduction in construction vehicle from Rs 476 million to Rs 804 million. This makes
me wonder because inspite of having such a huge order book and growing business why did
the construction accessories and construction vehicles reduced? There may be some reason
such as company is under cash crunch or they expect some business slipping out of hand.
NCC has cash on hand of only Rs 23.86 million and has current accounts with non scheduled
banks such as Standard chartered bank (oman) bank Muscat (oman), Nepal SBI, Urban
cooperative bank, Akola urban cooperative bank but no information is provided about the
current account balance of Rs 1017 million in 2009, as mentioned in annual report, which has
reduced from Rs 1799 million in 2008. The consolidated bank balance of NCC is at Rs 1670
million in 2009 against Rs 3177 in 2008. This all leaves many questions unanswered.

NCC has made unsecured advances of Rs 2803 million to its subsidiaries in 2009 as compared
to Rs 1981 million in 2008. It can be further noted that most of the advances are not paid back
by subsidiaries in 2008-2009.

NCC with less cash reserves, high working capital requirement, high sensitivity to input cost,
poor operating margins and too aggressive growth is entering into a zone where I won’t be
comfortable to invest in this company. My view is NCC is growing through a phase where if it
survives

Book Value per share Rs 80

Sales for last FY Rs 4136.7
Operating Profit Margin 8%
Net Profit Margin 3.7%
Sales growth 20%
Debt/Equity 0.5-0.7
Total Debt Rs 950 -1050 million
EPS Rs 6.1 (TTM)
52 Week high/52 week low 159/34
Promoter stake 24%
Beta 1.4
RONW 9.5%

Definitions:

Book Value: Paid up equity + reserves and surplus (excluding revaluation reserves)

RONW: (Net profit – preference dividend)/ (Equity paid up + reserves (excluding revaluation
reserves)

Operating profit margin: Profit before interest and tax/Sales revenue

Net Profit margin: Profit after tax/Sales revenue

Beta: Correlation coefficient showing return of stock with respect to return of underlying index

(): Signifies the value in the bracket is negative

Prepared by

Kedar Thumma