Ever since Nagarjuna Construction Company decided to exit from the cement business and dispose off some other loss-making businesses, its valuations improved dramatically. An, uneconomical cement capacity (the plant has a capacity of 0.2 million tonnes), very low selling prices as well as a as large exposure to debt led to a decline in the financial performance. A large chunk of the operating profit has been consumed by the debt servicing needs. Taken at the operating level, the company has been able to increase its operating profit y-o-y, but once again, higher interest payments caused an upset. In 1998-99, the interest coverage dropped to 1.2 times from 2.5:1 in the previous year. If the debt attributable to the cement division is taken out, the interest coverage ratio would have improved to 3:1. The company reported a loss of Rs 7.5 crore mainly due to the poor performance of the cement division. Hence, the decision to dispose off the cement plant. And there are plans to dispose off the wind farm businessas well, since the divisions earnings are inadequate to cover for interest and depreciation.The decision to exit from the cement business in favour of Priyadarshini Cement will result in a cash inflow of Rs 30 crore. The consideration also includes the transfer of a substantial amount of debt to the buyer. The debt equity ratio will be brought down to more manageable levels from the nearly 3:1 it was last year. The wind farm sale will yield a comparatively lower quantity of cash as and when it is fully sold. Eight turbines out of 12 have been sold, a loss of Rs 1.9 crore, which has been charged to the P&L account in 1998-99.
Its core competence is the construction business and operates with margins over 20%. Shorn of the cement and wind farm businesses, profitability will improve dramatically given these high margins, besides improving return on capital employed. The construction business has total orders on hand worth Rs 492 crore at the beginning of the current financial year. Bulk of these orders arefrom the infrastructure sector. And some of the orders are prestigious ones. The company has secured one order worth Rs 107 crore for the construction of all components of the combined water supply system linking 156 villages in Maharashtra. Another prestigious order received is a Rs 23 crore order to improve the arterial roads in Bangalore.
But despite the restructuring and focus on improving margins and cashflows, some problems could persist. The company has a number of associate companies in different business which have also been floundering. The company has kept its direct investment in form of equity investment and loans to the minimum, and range between Rs 2-3 crore, but instead has given counter and corporate guarantees worth Rs 65 crore. Given the precarious financial position of these associate companies a call to NCCL to honour these guarantees will prove detrimental to its finances.
However, the prospects for the company have improved tremendously the genesis of the improvement in the stockcoincide with its decision to restructure and stay focused on the construction business.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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