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IVRCL Infrastructure (IVRCL) reported mixed set of numbers for the third quarter,
with moderate growth on the top-line and EBITDA fronts but poor show on the
earnings level, led by higher interest cost. The outstanding order book including
L1 orders stood at `24,200cr (4x FY2011E revenue), which provides decent
revenue visibility; however, the key lies in funding captive orders and achieving
financial closure for the same. At current levels, the stock appears attractive on
the valuation screen, given that it is trading at a deep discount to its intrinsic value
and as we believe that downside from the current levels is capped. Hence, we
recommend Buy on the stock with a Target Price of `126.
Result in line with expectations: IVRCL reported 14.7% growth yoy on the top-line
front to `1,416.8cr (`1,234.7cr), in line with our estimate of `1,391cr. On the
operating margin front, the company posted a 90bp yoy improvement to 9.9%
(9.0%), marginally above our estimates of 9.2%. On the earnings front, IVRCL
reported a 1% decline yoy to `42.3cr (`42.7cr) exactly as per our expectations
despite higher operating margins because there was a jump in interest cost
(59.1% yoy and 23.2% qoq), which was higher than our estimates.
Outlook and valuation: IVRCL is trading at valuations of 0.8x on FY2012E P/BV
on one-year forward basis, which is very attractive considering that even post the
Lehman crisis (October 2008) the stock has been trading at 0.8–1.2x. Further, the
economy is in much better shape in comparison to those times. Hence, we believe
such valuations are unwarranted. At the CMP of `67, the stock is trading at 8x
FY2012E EPS and 0.8x FY2012E P/BV on standalone basis, adjusting for its
subsidiaries at 3.9x FY2012E EPS and 0.4x FY2012E P/BV. Therefore, on the
back of the company’s excellent execution track record, robust order book-tosales
ratio and comfortable valuations, we maintain Buy on the stock with a
Target Price of `126.
(9.0%), marginally above our estimates of 9.2%. Further, management has
guided for EBITDAM of 9.5–10% for the coming quarters and the same has been
accounted by us for FY2011 and FY2012 estimates.
Bottom-line growth under pressure due to higher interest burden
On the earnings front, IVRCL reported a 1% yoy decline to `42.3cr (`42.7cr), in
line with our estimates. The decline was despite good show on the top-line and
operating margin fronts. The major reason for the same was higher interest cost
(59.1% yoy and 23.2% qoq), above our estimates, on account of hardening of
interest rates during the quarter. We expect going ahead as well, IVRCL’s earnings
would be under pressure due to high interest cost.
Order book analysis
For the 9MFY2011, IVRCL had an order inflow of `7,500cr. The company has
been witnessing strong order inflow along with receiving international orders. The
outstanding order book stands at `24,200cr (including L1 orders) and is diversified
across five segments, in turn lending high revenue visibility.
Revision in estimates
Going ahead, management has given a guidance of ~15% growth for FY2012 on
the revenue front. Thus, we are pruning our top-line estimates for FY2012 to
`7,167.6cr from `7,667.6cr to factor in the same. IVRCL’s earnings are under
pressure due to hardening of interest rates and to account the same in our
estimates we have downgraded our earnings estimates by 6.3% and 11.9% for
FY2011 and FY2012, respectively.
Outlook and valuation
Trading at crisis-level valuations; opportune to Buy: IVRCL is trading at valuations
of 0.8x on P/BV on one-year forward basis, which is very attractive considering that
even post the Lehman crisis (October 2008) the stock has been trading at
0.8–1.2x. Further, the economy is in much better shape in comparison to those
times. Hence, we believe such valuations are unwarranted. On the PE parameter
as well, the stock is trading at very attractive multiples. At the CMP of `67, the
stock is trading at 8x and 3.9x to its FY2012E earnings without and with adjusting
for embedded value, respectively.
To conclude, the stock appears attractive on the valuation screen, given that it is
trading at a deep discount to its intrinsic value and as we believe that downside
from current levels is capped. Hence, we recommend Buy on the stock with a
Target Price of `126. Further, it should be noted that our SOTP target price factors
in IVRCL Assets on mcap basis, which is trading at 0.5x PB basis (FY2010). We
have assigned a 20% holding company discount to IVRCL Assets and Hindustan
Dorr-Oliver. We believe this limits the downside to our SOTP value due to a
reduction in embedded values.
We have valued IVRCL on SOTP basis. The company’s core construction business
is valued at P/E of 11x FY2012E EPS of `8.4 (`92/share), whereas its stake in
subsidiaries IVR Prime (`24/share) and Hindustan Dorr-Oliver (`10/share) has
been valued on mcap basis, post assigning a 20% holding company discount.
At the CMP of `67, the stock is trading at 8x FY2012E EPS and 0.8x FY2012E P/BV
on standalone basis and adjusting for its subsidiaries at 3.9x FY2012E EPS and
0.4x FY2012E P/BV. Therefore, on the back of the company’s excellent execution
track record, robust order book-to-sales ratio and comfortable valuations, we
maintain Buy on the stock with a Target Price of `126.
Investment arguments
IVRCL at par with peers on the revenue visibility front: IVRCL has an order book of
~`24,200cr (4x FY2011E revenue), of which ~37% is considered slow moving
(`6,000cr captive orders + `3,000cr AP orders), and markets are concerned about
the same. However, we believe excluding these orders also IVRCL’s order book
position is decent (refer Exhibit 17) at `15,200cr (~2.5x FY2011E revenue).
Hence, these concerns are overdone.
Raising equity at subsidiary level: Given its equity commitment over the next 12–18
months, we believe IVRCL would dilute its stake in either IVRCL Assets or Hindustan
Dorr-Oliver and infuse the money in IVRCL Assets for mobilising its captive road
projects. If IVRCL is able to achieve this, it would not only improve its working
capital cycle given that it constitutes ~23% of its order book, it would also lend a
fillip to execution.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Patel Engineering – 3QFY2011 Result Update
Angel Broking downgrades Patel Engineering to Neutral from Buy.
IVRCL Infrastructure (IVRCL) reported mixed set of numbers for the third quarter,
with moderate growth on the top-line and EBITDA fronts but poor show on the
earnings level, led by higher interest cost. The outstanding order book including
L1 orders stood at `24,200cr (4x FY2011E revenue), which provides decent
revenue visibility; however, the key lies in funding captive orders and achieving
financial closure for the same. At current levels, the stock appears attractive on
the valuation screen, given that it is trading at a deep discount to its intrinsic value
and as we believe that downside from the current levels is capped. Hence, we
recommend Buy on the stock with a Target Price of `126.
Result in line with expectations: IVRCL reported 14.7% growth yoy on the top-line
front to `1,416.8cr (`1,234.7cr), in line with our estimate of `1,391cr. On the
operating margin front, the company posted a 90bp yoy improvement to 9.9%
(9.0%), marginally above our estimates of 9.2%. On the earnings front, IVRCL
reported a 1% decline yoy to `42.3cr (`42.7cr) exactly as per our expectations
despite higher operating margins because there was a jump in interest cost
(59.1% yoy and 23.2% qoq), which was higher than our estimates.
Outlook and valuation: IVRCL is trading at valuations of 0.8x on FY2012E P/BV
on one-year forward basis, which is very attractive considering that even post the
Lehman crisis (October 2008) the stock has been trading at 0.8–1.2x. Further, the
economy is in much better shape in comparison to those times. Hence, we believe
such valuations are unwarranted. At the CMP of `67, the stock is trading at 8x
FY2012E EPS and 0.8x FY2012E P/BV on standalone basis, adjusting for its
subsidiaries at 3.9x FY2012E EPS and 0.4x FY2012E P/BV. Therefore, on the
back of the company’s excellent execution track record, robust order book-tosales
ratio and comfortable valuations, we maintain Buy on the stock with a
Target Price of `126.
Top line in line with estimates
On the top-line front, IVRCL reported 14.7% growth yoy to `1,416.8cr
(`1,234.7cr), in line with our estimate of `1,391cr. Management has lowered its
top-line guidance of ~`6,250cr (`6,500cr), which still implies growth run rate of
~54% yoy and 106% qoq for the last quarter.
As far as exposure to Andhra Pradesh (AP) is concerned, IVRCL still has orders of
~`3,000cr in AP. Further, the company has received ~54cr and has booked
revenue of ~`100cr and ~`250cr from AP for the quarter and nine months,
respectively.
On the segmental front, water and irrigation continues to be the highest
contributor to revenue with ~45% share both for 3QFY2011 and 9MFY2011. For
the quarter, the buildings, oil & gas and transport segments reported a share of
21%, 15.4% and 12.6%, respectively, and the remaining came from the power
segment.
Going ahead, management has given a guidance of ~15% growth for FY2012 on
the revenue front, which we have factored in our estimates.
On the operating margin front, IVRCL posted a 90bp yoy improvement to 9.9%
(9.0%), marginally above our estimates of 9.2%. Further, management has
guided for EBITDAM of 9.5–10% for the coming quarters and the same has been
accounted by us for FY2011 and FY2012 estimates.
Bottom-line growth under pressure due to higher interest burden
On the earnings front, IVRCL reported a 1% yoy decline to `42.3cr (`42.7cr), in
line with our estimates. The decline was despite good show on the top-line and
operating margin fronts. The major reason for the same was higher interest cost
(59.1% yoy and 23.2% qoq), above our estimates, on account of hardening of
interest rates during the quarter. We expect going ahead as well, IVRCL’s earnings
would be under pressure due to high interest cost.
Order book analysis
For the 9MFY2011, IVRCL had an order inflow of `7,500cr. The company has
been witnessing strong order inflow along with receiving international orders. The
outstanding order book stands at `24,200cr (including L1 orders) and is diversified
across five segments, in turn lending high revenue visibility.
Revision in estimates
Going ahead, management has given a guidance of ~15% growth for FY2012 on
the revenue front. Thus, we are pruning our top-line estimates for FY2012 to
`7,167.6cr from `7,667.6cr to factor in the same. IVRCL’s earnings are under
pressure due to hardening of interest rates and to account the same in our
estimates we have downgraded our earnings estimates by 6.3% and 11.9% for
FY2011 and FY2012, respectively.
Outlook and valuation
Trading at crisis-level valuations; opportune to Buy: IVRCL is trading at valuations
of 0.8x on P/BV on one-year forward basis, which is very attractive considering that
even post the Lehman crisis (October 2008) the stock has been trading at
0.8–1.2x. Further, the economy is in much better shape in comparison to those
times. Hence, we believe such valuations are unwarranted. On the PE parameter
as well, the stock is trading at very attractive multiples. At the CMP of `67, the
stock is trading at 8x and 3.9x to its FY2012E earnings without and with adjusting
for embedded value, respectively.
To conclude, the stock appears attractive on the valuation screen, given that it is
trading at a deep discount to its intrinsic value and as we believe that downside
from current levels is capped. Hence, we recommend Buy on the stock with a
Target Price of `126. Further, it should be noted that our SOTP target price factors
in IVRCL Assets on mcap basis, which is trading at 0.5x PB basis (FY2010). We
have assigned a 20% holding company discount to IVRCL Assets and Hindustan
Dorr-Oliver. We believe this limits the downside to our SOTP value due to a
reduction in embedded values.
We have valued IVRCL on SOTP basis. The company’s core construction business
is valued at P/E of 11x FY2012E EPS of `8.4 (`92/share), whereas its stake in
subsidiaries IVR Prime (`24/share) and Hindustan Dorr-Oliver (`10/share) has
been valued on mcap basis, post assigning a 20% holding company discount.
At the CMP of `67, the stock is trading at 8x FY2012E EPS and 0.8x FY2012E P/BV
on standalone basis and adjusting for its subsidiaries at 3.9x FY2012E EPS and
0.4x FY2012E P/BV. Therefore, on the back of the company’s excellent execution
track record, robust order book-to-sales ratio and comfortable valuations, we
maintain Buy on the stock with a Target Price of `126.
Investment arguments
IVRCL at par with peers on the revenue visibility front: IVRCL has an order book of
~`24,200cr (4x FY2011E revenue), of which ~37% is considered slow moving
(`6,000cr captive orders + `3,000cr AP orders), and markets are concerned about
the same. However, we believe excluding these orders also IVRCL’s order book
position is decent (refer Exhibit 17) at `15,200cr (~2.5x FY2011E revenue).
Hence, these concerns are overdone.
Raising equity at subsidiary level: Given its equity commitment over the next 12–18
months, we believe IVRCL would dilute its stake in either IVRCL Assets or Hindustan
Dorr-Oliver and infuse the money in IVRCL Assets for mobilising its captive road
projects. If IVRCL is able to achieve this, it would not only improve its working
capital cycle given that it constitutes ~23% of its order book, it would also lend a
fillip to execution.
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