IVRCL - Bad times expected :::Macquarie Research,

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IVRCL
Bad times expected
Event
 IVRCL hosted its 1QFY12 results conference call today. We remain
concerned over its execution, the worsening working capital and the equity
shortfall at the BOT subsidiary. We lower our target price by 65% to factor in a
cut in earnings and change in valuation methodology. We downgrade the
stock to Underperform with a revised target price of Rs35, as we think the
pain is likely to continue for a few more quarters.
Impact
 Large earnings miss in 1Q: IVRCL reported 2% YoY revenue growth to
Rs11.2bn, 7.6% EBITDA margin (-150bps YoY) and net earnings of Rs42mn
(-85%). Net earnings missed our and street estimates by a big margin.
 Revenue disappointment to continue in FY12: While IVRC continues to
suspend its guidance, it expects 1Q-like conditions to prevail in 2Q. We are
forecasting revenue growth of 5% in FY12 due to the following:
Rs28bn irrigation orders (13% of order book) exposed to political
uncertainties in AP.
Rs50bn in-house captive orders (23% of order book) – Rs30bn of other
orders to contribute Rs15bn revenues in FY12 need Rs1.8bn equity.
IVRCL’s expectation of selling mature assets and real estate may not
come to fruition with the current tough market conditions.
Rs33bn L1 orders (15% of order book) unlikely to move in next 12 mnths.
 Margin pressure to continue: 1Q margin was 7.5% (- 160bps YoY). The
company attributes this to lower revenues and cost escalation in certain water
projects, where costs have been booked but claims can only be made from
3QFY12. IVRC admits achieving EBITDA growth (in absolute terms) in FY12
may be challenging. We now forecast 8.5% margin in FY12 (vs 9% earlier).
 Balance sheet under severe stress: The working capital cycle remains
stressed due to loans & advances extended to IVRCL Assets and an increase
in advances to suppliers and sub-contractors. High interest rates imply 60%
of EBITDA is being eaten up by interest, leaving little for equity shareholders.
Earnings and target price revision
 We have cut our FY12E-FY13E EPS by 50% for the standalone entity due to
lower revenues, margins and higher interest costs. Our target price is revised
to Rs35 (from Rs99 earlier) to factor in a change in our valuation methodology
from 10x FY12E EPS to 5x EV/EBITDA.
Price catalyst
 12-month price target: Rs35.00 based on a Sum of Parts methodology.
 Catalyst: delay in execution pickup and further deterioration in working capital
Action and recommendation
 More pain before it gets better: IVRC needs to start delivering revenue
growth and repair its balance sheet to deliver meaningful growth in earnings.
We think the tough conditions are likely to persist for a few more quarters. We
downgrade to Underperform with a new target price of Rs35.