Raising of Rs4bn project equity improve EPS visibility; Buy
IVRCL Assets (IVRA), 80% subs. of IVRC, has raised Rs4bn in last two weeks.
This will not only meet ~30% of its equity requirement for its road projects till
FY12E but it will also kick-start EPS growth for the parent from 3/4QFY11E. This
is as equity funding at IVRA improves visibility of execution of 30% of its backlog.
Buy IVRC on a) pick-up in execution from 3QFY11E on resurgence in road
orders, b) benign material prices and c) peaked interest costs, drive 28% EPS
CAGR over FY10-12E vs flat FY08-10 and d) stock is inexpensive at 8.8x (core
business) FY12E EPS.
Smart funding – Raise ~30% of equity till FY12; less dilutive
Last week, IVRA raised Rs2.5bn @13.5%YTM from IFCI through Compulsory
Convertible Debentures (CCD) to fund ‘equity’ of its Indore-Gujarat and
Chenagapally tollways. The CCDs with ‘call-and-put option’ though will pressure
on P&L via interest of ‘debt-for-equity’ but it is non-dilutive for IVRC and will fund
~36% IVRA’s equity required till FY12E of these projects. Further, IVRA today
proposed placement of Rs1.5bn through 11.6mn equity shares @Rs129/share on
preferential basis to UTI Private equity, which will reduce IVRC stake to 75.7% (vs
80.5%) in IVRA. We expect IVRA to tie-up equity required till FY12E by 4QFY11
despite challenges it faces in concluding its proposed QIP.
Bullish On Roads; Parent balance sheet is OK on funding
We see mgt's renewed bullishness on roads as key driver of surprise ahead.
Road BOOT model has improved on a) higher govt. Grant (40%), b) Govt. support
on land acquisition promised by the new minister and c) lower interest rates. IVRC
has a well funded balance sheet to meet this growth – net D/E of 0.6x in FY10,
while its Infra arm, IVR Asset, will have to raise equity to fund new assets.
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