Macquarie : Buy IVRCL Funding key to sustained execution; target Rs134.

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IVRCL
Funding key to sustained execution
Event
 IVRCL reported 3Q FY11 results that were better than our and the street’s
estimates. Revenues increased 20% YoY, while earnings fell 8% due to
higher interest costs and a provisioning of Rs120m.
 We are lowering our EPS estimates by 13% and 29% for FY11 and FY12,
respectively, as we build in some delay in road projects in the BOT subsidiary
– IVRCL Assets – and higher interest costs. We are lowering our target price
to Rs134 (from Rs209) to reflect the change in earnings and change in
valuation methodology for subsidiaries (from DCF- to market cap-based).

Impact
 Execution picks up, interest costs hurt earnings: IVRC arrested its 10%
revenue decline in 1H FY11 by delivering 20% revenue growth in 3Q FY11. A
sharp rise in interest outgo (due to a spike in interest rates) hurt earnings,
which fell 8% YoY. Adjusted for provisioning of Rs120m, PAT grew 14% YoY.
 Aggressive execution needed in 4Q FY11 to meet its guidance: IVRC
needs 40% revenue growth in 4Q FY11 to meet its FY11 revenue guidance of
Rs62.5bn. Sustained revenue booking on in-house road BOT projects is likely
required to meet the revenue guidance.
 Group exploring money-raising options for equity shortfall in IVRCL
Assets: IVRCL Assets needs equity funding of Rs7.5bn over the next 18–24
months. Management is exploring fund-raising options of QIP or a stake sale
in operational projects to raise around Rs5bn and Rs2–2.5bn by convertible
debt at SPV levels.
Funding in IVRCL Assets critical for parent co.: In-house road projects
form 25% of IVRCL’s Rs240bn order book. Delay in execution of these
projects due to any reason could put revenue growth in FY12 at risk.
Earnings and target price revision
 We are cutting our FY11E and FY12E EPS by 13% and 29% following a 5%
and 16% cut in revenues and higher interest costs, respectively. We are
reducing our target price to Rs134 (from Rs209) to reflect the EPS cut and
change in valuation methodology for IVRCL Assets from DCF-based to
market cap-based valuation.
Price catalyst
 12-month price target: Rs134.00 based on a Sum of Parts methodology.
 Catalyst: Pickup in execution of projects.
Action and recommendation
 Execution pickup needed to meet expectations: We believe IVRC needs
to pick up its execution further to meet its revenue guidance in FY11 and
avoid a further de-rating due to non-delivery. In our view, equity fund raising in
IVRCL Assets is critical for revenue growth in FY12. We maintain our
Outperform rating with a revised target price of Rs134.


3Q FY11 – mixed bag: revenue pickup encouraging, interest cost a drag
 Revenues pick up, registering 20% YoY growth: IVRC reported a 20% jump in its 3Q FY11
revenues. We think this comes as a major relief to the street after a disappointing 10% decline in
1H FY11.
 Margins normalise back to 9.5–10% levels: The margin in 3Q FY11 came in at a healthy 9.9%
(10bp improvement YoY) after a 20bp decline in 1H FY11.
 Hardening interest rate hurts interest outgo: The company’s interest outgo increased 23%
QoQ despite stable working capital at Rs22bn. The sharp increase is due to the spike in interest
rates.


Order book – 25% is in-house, funding critical going forward
 Funding critical for execution of the road order book: IVRCL Assets comprises 25% of IVRC’s
Rs240bn order book. IVRCL Assets needs Rs7.5–8bn of equity over the next 18–24 months. The
company is targeting to raise Rs2.5–3bn through convertible debt at SPVs and Rs4.5–5bn through
QIP, stake sale in SPVs or monetisation of land.
 Decent progress on in-house order book: The company has made decent progress in the
construction of the Baramati-Phaltan road (30% complete), the Indore-Gujarat road (17%
complete) and the IOTL tankage project (65% of IVRC’s construction portion is complete).
 Order inflow to pick up in FY12: Order inflow has been slack in 9M FY11. We expect a
meaningful pickup in order inflow in FY12.

Revising our standalone forecasts – cutting FY11E and FY12E EPS by

13% and 29%, respectively
 Revising our revenue forecasts by 5–16% for FY11–12: We are marginally reducing our FY11
revenue estimate by 5%, as we believe that even with 20% revenue growth in 4Q FY11 it will only
be able to clock Rs58–59bn. For FY12, we have factored in slow progress on the road projects
due to lack of immediate funding.
 Increasing interest outgo to factor in higher interest cost: We have increased our interest
outgo forecasts for FY11–12, as the company’s borrowing cost has increased following the
increase in interest rates.
 Reducing our FY11 and FY12 earnings forecasts by 13% and 29%, respectively: While a
16% earnings cut in FY12E is due to a revenue decline, the remaining is due to higher interest
costs. We are reducing our earnings forecasts by 13% and 29% over FY11E and FY12E,
respectively, to factor the same.



Revising our target price from Rs209 to Rs134
 Reducing core business valuation due to sharp cut in EPS: We have reduced our core
business valuation by 32% mainly due to the cut in FY12E EPS by a similar amount. We assign a
10x multiple to FY12E earnings in our valuation.
 Valuing IVR Assets at current market cap: We have changed our valuation methodology for
IVRCL’s BOT subsidiary – IVRCL Assets – from DCF-based valuation to market cap-based
valuation. This is mainly due to uncertainty in the equity funding gap. Our valuation for IVRCL’s
80.5% stake in IVRCL Assets has fallen by 50% due to this.
 Revising our target price to Rs134: Our revised target price is Rs134 (down 36% from our prior
target price of Rs209) on account of the above-mentioned factors.