BNP Paribas: Buy IVRCL Infra; TARGET INR124

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IVRCL Infra -Execution turnaround

• ƒQ3FY11: Revenue, EBITDA and adjusted PAT in line 
• ƒOrder inflow INR75b; order book-INR220b, 3.6x FY11E revenue 
• ƒ Risk-reward in favor of investors, maintain BUY 
• ƒ TP INR124; Standalone INR100; Listed subsidiaries INR24 

Q3FY11 – no major surprises 

IVRCL reported INR14.2b revenue for 

Q3FY11 20% higher y-y (in line with our 

estimates). EBITDA margin was 9.9%, 

essentially flat y-y (in line with our 

estimates). Excluding, a one-time write-off 

of receivables worth INR12b from Andhra 

Pradesh government, EBITDA margin 

would have been 80bps better than our 

estimate. Interest cost increased 61% y-y 

to INR591.8m (20% higher than our 

estimate). Reported PAT was INR424.9m, 

7% lower y-y (16% lower than our 

estimate largely due to higher interest). 

Pro forma PAT (excluding one-time writeoff) was INR544.9m, 19% higher y-y (7% higher than our estimate). 

Outlook 

The company reported essentially in-line Q3FY11 on a pro forma basis. 

However, management was very confident of Q4FY11 performance and 

meeting their INR62.5b FY11 revenue guidance (we are already half way 

through the quarter). However, we believe increase in execution rate is 

key for IVRCL. Its internal orders (INR50b, or 23% of order book) should 

help the company ramp up its execution, in our view. Andhra orders now 

form 13% of the order book, while Maharashtra orders are now 

contributing 30% of the order book. We give the company the benefit of 

better working capital in Q4FY11 in line with its fourth quarter trend 

witnessed in FY10. As a result, we are not factoring any additional debt 

beyond the Q3FY11 level. Management indicated there will be no 

additional equity investments by the parent in its BOT subsidiaries in 

FY12. The company has sufficient funds for FY12 and may sell stake in 

its BOT projects to partly fund the balance equity requirement (INR7b). 

Valuation 

We believe the stock price correction has more than adequately factored 

in the execution slowdown and the balance sheet position. At these 

levels, we find value in the stock over a 12-month period and maintain 

our BUY rating. Our SoTP-based TP of INR124.00 has declined from the 

previous INR176.00 mainly due to higher debt and a fall in the market 

value of its subsidiaries. The standalone business now contributes 

INR100, based on 6.5x 1-year forward NTM EV/EBITDA (10x implied 

P/E). IVR Assets and Hindustan Dorr contribute INR15 and INR9, 

respectively, based on a 25% holding company discount to their current 

market caps. Risks to our recommendation include: slower order intake, 

poor execution, inflation, higher interest costs, and failure to raise capital 

at the subsidiaries.

The Risk Experts 

• Our starting point for this page is a recognition of the macro

factors that can have a significant impact on stock-price 

performance, sometimes independently of bottom-up 

factors.  

• With our Risk Expert page, we identify the key macro risks 

that can impact stock performance.  

• This analysis enhances the fundamental work laid out in 

the rest of this report, giving investors yet another resource 

to use in their decision-making process. 

The company reported largely in-line Q3FY11 on a pro forma basis. Order inflow during 

9MFY11 of INR75b, including INR20b of L1 orders was below expectations (5% 

decrease y-y). Orders from Andhra continue to be 13.5% of order book (INR242b 

including INR20b of L1). Internal orders (INR50b) are 22.5% of order book, and have to 

be executed by FY13. Excluding orders from Andhra (INR30b), internal orders 

(INR50b), IVRCL still has an outstanding INR140b order book, which on average has to 

be executed over 30 months. This implies INR56b of revenue over a 12-month period; 

an additional INR20b from its internal road projects would result in close to 20% top line 

growth in FY12. However, we are conservatively assuming 16% revenue growth. We 

believe the company will be able to keep its working capital levels flat with Q3FY11 on a 

similar trend as last year. (Last year the company had reported a decline of almost 

INR3-4b, or 10%, between Q3FY10 and FY10). On the margin front, the company 

reiterated EBITDA margin between 9.5-10%. And during Q3FY10, margin was 80bps 

better than our estimate on a pro forma basis. Consequently, we increased our EBITDA 

margin expectation by 20bps in FY12-FY13. We also increased our gross debt level to 

factor Q3FY11’s numbers. Our depreciation estimates have increased due to higher 

capex estimates in FY12-13 by INR500m each, based on FY11 run rate. Interest cost 

estimates for FY11-13 have increased mainly due to higher debt estimates (as above). 

Consequently, our net profit estimate has essentially been flat in FY12 and increased 

13% in FY13. 

We are cutting our TP of IVRCL by 29.5% to INR124 from INR176. Standalone 

business now contributes 81% of our TP (earlier 70%). We cut our standalone valuation 

from INR123 to INR100 (19% cut). Almost all of it is due to higher debt. Our earlier TP 

was 7x EV/EBITDA with net debt of INR17.5b; now we are using 6.5x EV/EBITDA with 

a net debt of INR21.4b. Our value for IVRCL Assets has declined from INR39 to INR15 

due to a drop in its market value market price declined from INR100 to INR53. Our 

value for Hindustan Dorr has declined from INR14 to INR9 due to a drop in its market 

value (market price declined from INR126 to INR85)