IVRCL -Weak quarter; strong order book the only silver lining;: Edelweiss

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􀂄 Topline continues to disappoint; margins decline
IVRCL Infrastructure’s (IVRCL) Q2FY11 topline, at INR 10.8 bn, was flat Q-o-Q
and down 12% Y-o-Y. Management indicated that heavy monsoons impacted
revenue booking to the tune of INR 3.0 bn. H1FY11 revenues, at INR 21.8 bn,
were down 5% Y-o-Y, which has led to IVRCL cutting its revenue guidance from
INR 67-70 bn to ~INR 65 bn for FY11. EBITDA margins, at 8.9%, were down
20bps Q-o-Q and 50bps Y-o-Y. The company’s working capital cycle shot up
sharply in H1FY11 due to support extended by the parent company to its
subsidiaries; consequently, debt levels rose by ~INR 6.5 bn. Increased capital
charges meant that PAT margins, at 2.2%, were lower 180bps Y-o-Y and 40bps
Q-o-Q. PAT for Q2FY11, at ~INR 233 mn, was lower 17% and ~52% Q-o-Q and
Y-o-Y, respectively.


􀂄 Order intake strong; revenue visibility not a concern
Currently, IVRCL has an order book of ~INR 240 bn (including L1 orders of INR
12 bn); this is ~4.5x TTM revenues, resulting in strong revenue visibility. IVRCL
received orders of ~INR 53.4 bn this quarter. It expects to end the year with an
order book of INR 260-280 bn.

􀂄 Outlook and valuations: Execution concerns remain; maintain ‘BUY’
We have revised our estimates to factor in the disappointment in revenues in
H1FY11. Our sum-of-the-parts (SOTP) based target price for the stock is INR
159. We have valued the listed subsidiaries, IVR Assets and Hindustan Dorr
Oliver, as per their market cap; adjusted for IVRCL’s stake and a holding
company discount, these contribute INR 50.4 and INR 15.6, respectively, to our
SOTP price. Adjusting for this, at CMP of INR 133, for revised fully diluted EPS
estimate of INR 6.8 and INR 8.0, the EPC business is available at a P/E of 9.9x
and 8.4x FY11E and FY12E, respectively.

Execution in the past few quarters has been soft for IVRCL, but we believe that
the company can ramp it up in the remaining fiscal. We consider current
valuations attractive, considering the company’s strong order book and value
accretion in the BOT business and, thus, maintain ‘BUY’ on the stock. On
relative return basis, we rate it ‘Sector Outperformer’