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IVRCL Infra: Building the ‘India’ story! - Views on News from Equitymaster
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IVRCL Infra: Building the ‘India’ story!
Apr 3, 2006

Infrastructure development in India has taken off in a major way in the past two years. It is also being estimated that the country would be merely scratching the surface of the potential infrastructure opportunity with US$ 190 bn (Rs 8,550 bn) of investments committed over the next few years. Moreover, it is being expected that the infrastructure segment alone has the potential to absorb US$ 150 bn (Rs 6,750 bn) of foreign direct investment in the coming five years. This potential has attracted many a players to be a part of infrastructure creation in the country. IVRCL Infrastructure & Projects Ltd (IVRCL) is one of the larger players in the business. Here is an analysis of the company’s past, its current stature and future growth prospects.

Company background
IVRCL Infrastructures & Projects Ltd., (formerly IVR Constructions Limited) was incorporated in 1987 and commenced its operations in 1990, thereby establishing itself as a premier EPCC (Engineering Procurement, Construction and Commissioning) & LSTK (Lump Sum Turnkey) Service Provider with front-end engineering capabilities. The company initially undertook small projects for building hospitals and roads in the interior regions of the country. Of late, it has emerged as a major player in water transmission, treatment and wastewater management. The company has grown from strength to strength by executing a large number of water-based projects and is today the market leader in water related contracts across the country. IVRCL is also known for its desalination drive, which was vindicated by it winning the Chennai Desalination Water Plant Project from the government. Beside this, the company is also into the business of constructing buildings and industrial structures.

Financial analysis
Increased investments in infrastructure development and higher order inflows for IVRCL have helped the company to grow strongly in the past few years. As a matter of fact, the company’s topline and bottomline is expected to rake in compounded growth of 39% and 32% respectively during FY02 to FY06. However, in line with its peers, despite the strong growth in business, the company has not been able to improve upon its profitability, In fact, the company’s net margins of 5.3% during 9mFY06 were 90 basis points lower that what the company had earned in FY02 (6.2%). This is seemingly owing to the fact that the sector has seen a large-scale influx of new players and the consequent increase in competition has made the business largely dependent on volumes. Companies, across the spectrum, have been forced to give up on margins to get orders and the same has seemingly been the case with IVRCL. We expect the margins to remain in the sub-10% territory going forward as well.

Financial snapshot
(Rs m) FY02 FY03 FY04 FY05 9mFY06
Net Sales 3,920 4,403 7,735 10,547 9,458
% Growth - 12.3% 75.6% 36.4% -
EBITDA 362 429 636 865 790
EBITDA margins (%) 9.2% 9.7% 8.2% 8.2% 8.4%
Other Income 6 11 21 24 14
Depreciation 45 78 98 80 74
EBIT 323 362 559 809 731
EBIT margins (%) 8.2% 8.2% 7.2% 7.7% 7.7%
Interest 13 120 220 214 203
PBT 310 241 339 595 528
Tax 68 85 (53) 28 30
PAT 242 156 392 567 498
Net profit margin(%) 6.2% 3.5% 5.1% 5.4% 5.3%
Annualised EPS (Rs) 2.3 1.5 3.7 5.3 4.7

IVRCL earns over 60% of its revenues from water and water related projects, which also account for around 55% of the company’s order backlog at the end of 9mFY06. One of the major projects from this segment includes the 100 million litres per day (MLD) seawater desalinisation plant in Chennai for a consideration of Rs 5 bn. The project is on Build-Operate-Transfer (BOT) basis and the company will be operating the same for a period of 25 years. Some of the other large BOT projects in IVRCL’s bag include:

  • Rs 8.5 bn Tamil Nadu 102 km road projects (concession period of 20 years)

  • Rs 2.6 bn Jalandhar-Amritsar 49 km road project (concession period of 20 years including construction period of 2.5 years)

While IVRCL’s foray into BOT based road development contracts has the potential to improve the overall profitability of the company, investors also need to understand the fact that BOT revenues can be highly volatile due to actual traffic varying widely from the estimated numbers. Also, considering the price elasticity of the business (higher the toll, lower will be the traffic), there might be instances where there is diversion of traffic to non-toll based alternate roads, which might affect the overall revenue projection. This has been a case with some of the other domestic road companies in India as well and, as such, the risk needs to be understood carefully.

What to expect?
At the current price of Rs 280 (post the 5:1 split), the stock is trading at a price to earnings multiple of 39.6 times its trailing 12-month earnings. While this might look steep from a medium term perspective, we believe that the company has the potential to grow its revenues and profits strongly on the back of strong accretion to the order book and improved mix of contract and BOT projects. In being a participant to infrastructure creation in the country in the past, we believe that IVRCL has attained a critical mass in terms of resources, technology and manpower skill sets with excellent technical tie-ups and partnership with leaders in different infrastructure segments.

The company is also eyeing other emerging markets and has identified countries like Mauritius and the Middle East region as prospective markets. The management estimates revenues of Rs 20 bn in FY07 (38% YoY growth over estimated FY06 revenues) and is also looking at growth through the inorganic route. Acquisition of Hindustan Dorr Oliver was the first step in this direction.

We shall soon be initiating our coverage on IVRCL.

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