IVRCL-Another disappointing quarter—Kotak Sec

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IVRCL (IVRC)
Construction
Another disappointing quarter—road project execution likely lagging. IVRCL
reported disappointing revenues of Rs10.8 bn, 19% below our estimates. Note that
revenues were also supported by high other income of Rs248 mn. Apart from heavy
monsoons, we believe that a lack of progress in road and other BOT projects may have
led the slower-than-expected execution. Margins declined by about 50 bps yoy on
negative operating leverage leading to a net PAT of Rs233 mn, down 52% yoy.





Disappointing results on revenues; even margins are lower on negative operating leverage
IVRCL reported disappointing revenues of Rs10.8 bn, down 11.7% and about 19% below our
estimates. The negative operating leverage (due to sedate revenues) led to a 50 bps decline in
EBITDA margin to 8.9% in 2QFY11 versus our estimate of Rs9.7%. Note that margins for the
quarter were likely to be supported by high other operational income (of Rs248 mn in 2QFY11
versus Rs40 mn in 2QFY10). IVRCL reported a net PAT of Rs233 mn in 2QFY11, down 52% yoy
and about 51% below our estimate of Rs479 mn. Order inflows remained strong at Rs53.5 bn in
2QFY11 leading to a backlog of Rs240 bn; however, execution of this large backlog remains key.
For the half year ending September 30, 2010, IVRCL reported revenues of Rs21.8 bn, down 5.3%
yoy. EBITDA margin at 9% was about 30 bps down on a yoy basis leading to a 1HFY11 net PAT of
Rs514 mn, down 38.8% yoy.

Likely to miss aggressive revenue guidance of Rs67.5-71 bn in FY2011E
The aggressive revenue guidance of Rs67.5-71 bn in FY2011E implies a very strong growth
requirement of about 43-50% in 2HFY11E. We believe this would be difficult to achieve as it
requires a high quarterly revenue booking run rate of about Rs22-23 bn. We have built in FY2011E
revenues of Rs64.2 bn implying a revenue growth of 33% in remaining 2HFY11E. We would
revisit our estimates and target price post the conference call.

Lack of progress on road projects may have compounded monsoon-led disappointment
We believe that in addition to the impact of the heavy monsoons on the execution, the
disappointment in 2QFY11 revenues might also have been on account of slower-than-expected
progress of the road and other BOT projects in the portfolio of the company. The management
had cited delays in the Gujarat-MP border road project as well as the IOCL tankage orders leading
to a net revenue loss of about Rs1 bn in 1QFY11.

Retain earning estimates and target price till the investor conference call
We retain our estimates of Rs9.1 and Rs11.6 for FY2011E and FY2012E. Reiterate BUY (TP: Rs205)
on (1) relatively attractive valuations, (2) strong likely near-term growth, (3) high revenue visibility.