Riding the construction wave…
With a robust order book and pick-up in the execution rate, we expect
IVRCL’s revenues to grow at a CAGR of 23.4% during FY10-FY12E in the
construction business. In the BOT space, the company has expanded its
asset portfolio aggressively through its subsidiary IVRCL Assets and
Holdings (IVRCLAH). The company currently has 12 BOT projects
(excluding recently received road project) with an asset base of Rs
12,667 crore, out of which five are currently operational. Additionally,
the company’s other subsidiary, HDO, is well poised to benefit from the
aggressive capex plans of domestic mining companies and the pick-up
in industrial capex. We are initiating coverage on the stock with
STRONG BUY recommendation and SOTP target price of Rs 206/share.
Strong revenue visibility
With an order book of Rs 23,275 crore in Q1FY11, IVRCL enjoys good
revenue visibility (TTM book-to-bill ratio of 4.3x, 2.6x adjusted for
contentious and captive orders). With high revenue visibility,
improvement in order inflows and a pick-up in execution rate, we project
IVRCL’s revenues will grow at 23.4% CAGR in FY10-12E to Rs 8,334 crore.
Marked expansion in BOT project portfolio
IVRCLAH is expanding its road portfolio aggressively. Currently, the
company has 12 BOT projects (of which five are operational) with an asset
base of Rs 12,667 crore. The management expects a total revenue of Rs
1,080 crore (~73% share of road BOTs), once all projects are operational.
We value IVRCL’s stake in IVRCLAH at Rs 52/share (at a 25% holding
company discount on current market cap).
HDO to sustain growth momentum
We expect the net earnings of Hindustan Dorr-Oliver (HDO) to grow at a
CAGR of 33% during FY10-FY12E, fuelled by aggressive capex plans of
domestic mining companies and the pick-up of industrial capex. We value
IVRCL’s 55% stake in HDO at Rs 15/share (at a 25% holding company
discount on current market cap).
Valuation
At the CMP, the stock is trading at a P/E of 11.7x in FY11E and 8.7x in
FY12E (after adjusting for the subsidiary value). Our SOTP based price
target is at Rs 206/share. We have valued the construction business at
FY12E P/E of 12x at Rs 136/share. IVRCL’s stake in IVRCLAH and HDO
are valued at Rs 54/share and Rs 16/share, respectively. We are
initiating coverage on the stock with a STRONG BUY rating.
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