The 3QFY11 results came in 35% below profit guidance due to payment-receipt delays and adverse weather. We trim our FY11 EPS forecast 21% accordingly.

Following the stock's steep correction, we believe it is in the value zone as the power division rapidly recovers and government spending rises.

Disappointing 3Q results as sales growth slows and interest expenses rise
For 3QFY11, Nagarjuna's parent recorded 7% yoy and 11% qoq dips in normalised PAT to Rs444m, despite growth in net sales. Higher interest expenses (up 43% yoy and 17% qoq) due to rising interest rates and a jump in receivables had an impact on PAT. The EBITDA margin slipped marginally (30bp yoy, 70bp qoq) due to a sharp labour cost hike. The results were disappointing, coming in 35% below our forecasts and 20% below Bloomberg consensus. Quarterly EPS was Rs1.6 for the parent and Rs2.0 consolidated.

We reduce our FY11 EPS forecast 21% to fall in line with revised guidance
Management highlighted that 3Q PAT was 35% lower than its guidance, due to a delay in payment receipts, adverse weather and land-acquisition delays. A slowdown in government machinery orders against a backdrop of corruption scandals seems to be taking a toll on execution and order inflow, especially in states such as Andhra Pradesh and Gujarat, and in the National Highways Authority of India (NHAI). Despite building in marginal improvement in government-budgeted spending for 4QFY11, we trim our FY11-12 sales forecasts 8-12% but cut our FY11 EPS forecast by a steep 21% to reflect higher interest costs.

Gradual pick-up on the cards, worst already seems priced in; we recommend Buy
A sharp correction since August following the environmental clearance issues at its Sompeta power plant has brought the stock into the value zone, in our view. A pending Rs2.7bn site acquisition should enable management to quickly shift the plant to a new site and keep the impact marginal. Management expects EPC (engineering procurement and construction) orders from NELCAST to flow though soon to the parent. On the core construction business, unexpected delays from adverse weather are behind us, and government spending is likely to increase in February/March to meet full-year budgeted expenditure. We feel the worst is now priced in, as after adjusting for a revised subsidiary value of Rs41.4 the valuation looks attractive at 7.7x FY11F PE, with signs of business improvement on the cards from the December low. We reiterate Buy, with a revised target price of Rs141.4.