Buy Nagarjuna Construction; target of Rs 255: M Lynch

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Merrill Lynch is bullish on Nagarjuna Construction and has recommended buy rating on the stock with a target of Rs 255.

 

Merrill Lynch report on Nagarjuna Construction:

 

Blackstone Ends Equity Overhang, new PO of Rs 255 (+25% upside potential) 

 

We see NJCC stock is starting to outperform after its underperformance (17%  YTD) led by the following triggers: a) End of an equity overhang with recent  USD 150 million placement to Blackstone Group, USA, b) visible & strong earnings  CAGR of 35%, c) addition of value accretive Infra projects portfolio, and d)  inexpensive valuations. We maintain our Buy rating and raise our PO to Rs 255  (from Rs 235) as we roll-forward earnings and add Infra projects to SOTP, as  NJCC secures funding for its growth. 

 

Blackstone buys 12.3% for US$150mn in 2 tranches; EPS cut 

 

NJCC's board approved the issue of 20.2mn equity shares at Rs202.5/sh and  9.1mn warrants at Rs225/sh to the Blackstone Group, USA, to raise ~Rs 6.15 billion. A  key advantage is that the company already has a battery of Infra projects ready to  invest these funds and hence, it is not dilutive for SOTP. We have cut our parent  earnings by ~3-4% for FY08-09E on 12.3% equity dilution (post-issuance equity). 

 

We look for the core drivers of the stock to be: 

 

35% CAGR in earnings over FY07-10E; 

 

Expansion into high growth & profitable domains along with suitable partners  - steel plant construction with POSCO, railways and Oil & Gas pipelines ; 

 

Value accretive Infra projects added across Ports, Hydro power & real estate; 

 

In-expensive valuation - 12.3x FY09E (50% discount on Infra / Realty subs.); and 

 

Stock underperformance (17% YTD) led by an equity over-hang.