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IVRCL (IVRC)
Construction
Monsoons over; but road execution pick-up may still be slower than expected.
Sedate revenues were attributed to extended monsoons (impact of Rs3 bn) and slowerthan-
expected progress of road projects due to delays in financial closure. Management
has correspondingly reduced its FY2011E guidance by Rs3 bn (to Rs65 bn). BOT assets
would require incremental equity of Rs15 bn—banking on QIP for the same. Delays/
difficulties in raising equity may put stress on balance sheet/ further delay execution.
Extended monsoons and slow road projects execution impact revenues; lowers FY2011E guidance
The management attributed the revenue disappointment in 2QFY11 to the extended heavy
monsoons leading to lower revenues to the tune of Rs3 bn. The management believes that this
loss would not be recovered in 2HFY11E and hence has reduced its full-year FY2011E guidance by
the same extent to Rs65 bn—implies strong growth requirement of 35% in 2HFY11E. The
revenues in 2Q were also impacted by slow progress on the road projects led by delays in financial
closures on documentation issues. This is also reflected in low contribution of the roads segment
to total revenues (12% in 1HFY11) versus 30% contribution to the 1HFY11-end backlog. We
believe that water and irrigation segments have contributed their fair share to total revenues.
Loans & advances to subsidiaries has stressed the standalone balance sheet
IVRCL reported an increased net debt level of about Rs7.3 bn to Rs21.2 bn at end-Sept 2010
versus FY2010-end level of about Rs15.5 bn primarily due to higher loans and advances to
subsidiaries for investment in the BOT assets. Management expects some of this money to come
back post the QIP of IVRCL Assets; expects year-end debt of Rs18 bn vs our estimate of Rs22 bn.
Equity requirement of BOT projects may lead to stress on standalone balance sheet/execution delay
Present portfolio of IRCL Assets BOT projects requires incremental equity of about Rs15 bn. Delays/
difficulties in raising this equity would potentially lead to lower construction revenues and/or may
put stress on the standalone balance sheet. Part of this would be met through the issue of
compulsorily convertible debentures of Rs2.5 bn to IFCI and preferential allotment of Rs1.5 bn to
UTI Ascent India Fund III. The company is also banking on IVRCL Assets QIP for this equity finding.
Retain BUY; but prefer Nagarjuna on smaller exposure to BOT assets and slightly better execution
We revise our estimates to Rs7.7 and Rs10.3 from Rs9.1 and Rs11.6 for FY2011E and FY2012E.
Retain BUY with a TP of Rs190 (from Rs205) on (1) attractive valuations—core construction
business trading at 7.7X FY12E earnings, (2) strong likely near-term earnings growth and (3) high
revenue visibility. However, we prefer Nagarjuna over IVRCL based on (1) lower exposure to BOT
assets and hence likely lower stress on standalone balance sheet and (2) slightly better execution.
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