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IVRCL Infrastructure-Testing Times
IVRCL’s equity requirement of Rs14bn for mobilizing the recently bid
IVRAH road projects (constitutes 23% of IVRCL’s order book) is making
an equity dilution/raising at the subsidiary level inevitable. Execution
disappointments vis-à-vis aggressive guidance is expected to continue
in the near term leading to further declines in PBT margins. We
reiterate our SELL stance on IVRCL whilst noting that the recent stock
price decline limits shareholders’ downside from the current levels.
IVRCL stock is down 24% over the last three months (in line with the sector)
due to execution delays, worsening working capital turnover and rising equity
needs. Despite relatively poor share price returns over the last five years,
IVRCL’s stock is one of the most hyped in the sector given its industry leading
revenue growth rate over FY05-09 (CAGR 47%) and dominance in the
promising water-related segments. Whilst we believe that its long-term growth
can be better than its recent performance, the stock price may see further
(albeit modest) declines before investor returns can be generated.
Key Investment Drivers
Nearly 40% of the order book is facing execution challenges: Whilst
IVRCL has one of the largest order books in the sector and a high book-tobill
ratio (4.5x), nearly 40% of the Rs240bn order book is facing execution
issues (Rs40bn of irrigation orders and Rs55bn of captive orders). We
believe such slow moving orders make the situation worse for IVRCL at a
time when the industry is facing slow execution across other sectors. We
expect 2HFY11E revenues to grow 19% YoY, implying 13% YoY growth for
FY11.
Equity raising — important and difficult: IVRCL was among the first
construction companies to raise equity in the early years of the noughties
followed by a couple of equity raisings at the parent and the subsidiary
levels (total equity raisings of Rs10bn over FY04-08). However, over the
last few quarters, the company has been facing the lack of capital given
the rising debt-equity and the increasing need of equity for mobilizing the
recently bagged infrastructure assets. Lack of capital has led to regular
delays in booking construction revenues from captive contracts.
Valuation, Recommendation and Outlook
We do not expect standalone operations to turn FCF positive up to FY13 on
account of poor working capital and gross block turnover, despite marginal
improvements in PBT margins. Our SOTP-based valuation is Rs109/share
(Rs59/share for the construction business, Rs19/sh for Hindustan Dorr Oliver
(HDO) and Rs31/sh for IVRAH). Adjusting for subsidiaries’ valuations, IVRCL’s
stock trades at 9.8x FY12E construction EPS of Rs8.4. Poor cashflow profile and
likely dilution of subsidiaries at distressed valuations can lead to further
declines in multiples.
IVRCL provides construction services for the water,
irrigation, roads, railways, civil structures, power
transmission and distribution sectors. The company was
started in 1987 mainly with irrigation projects and has,
over the last decade, expanded into other segments.
IVRCL acquired Hindustan Dorr Oliver (HDO) in 2005
for Rs539mn in order to increase its water-based
strengths as HDO provides it with technology for EPC
and design work for urban and industrial water-based
projects amongst other things. Apart from the mainstay
construction business, the company is also involved in
developing its own toll roads, a water desalination plant
and in developing real estate.
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