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IVRCL Infra: Conference call extracts

Apr 5, 2010

We recently had a conference call with the management of IVRCL, a mid cap construction company, in order to get a broader sense about the situation prevailing in the industry and business. Here are the key takeaways from the meeting. Snapshot of the business: IVRCL Infrastructure & Projects Ltd. (IVRCL) is one of the leading players in EPC and lump sum turnkey contract implementation in India. The company has presence across four business verticals - Water Supply & Irrigation (48% of order book), Transportation (23%), Buildings and Housings (23%) and Power (6%). IVRCL forayed into BOT/BOOT type projects in 2001. It currently has 7 road BOT projects, 2 water BOT projects, and 1 tankage project under its portfolio. Its key subsidiaries include Hindustan Dorr Oliver (HDO; 55% stake) and IVR Prime Urban Developers (IVR Prime; 80.5% stake). HDO is an engineering major while IVR Prime is a real estate developer having land parcels across western and southern India. IVR Prime has 3,393 acres of land and shelters IVRCL’s road and water BOT assets after the corporate restructuring exercise undertaken recently.

Key excerpts:

  • Despite the Andhra Pradesh overhang (constitutes 17% of the order book), IVRCL’s management is confident of delivering the year end revenue target (Rs 58-61.5 bn) for FY10. This appears rather challenging to us implying a revenue growth of 65% YoY in 4QFY10 (at the top end of the guidance).

  • The management expects revenues to be in the range of Rs 65-70 bn for FY11. This should not be difficult considering the current order backlog of Rs 230 bn (representing backlog to sales ratio of 4.5 times) and historical execution rate.

  • The company plans to maintain its leadership position in the water supply and irrigation segment. At the same time, it plans to bid for projects in the power and transportation segment.

  • The management plans to sell chunk of the non strategic land parcels situated in western and southern India (an effort to gradually exit from the real estate business) in order to unlock value. The funds raised will be invested in future BOT projects.

  • Around 95-98% of the company’s projects have a price escalation clause. This provides a natural hedge against cost inflation and shields margins. The management is confident of delivering 9.5-10% operating margins in the future. As far as client composition is concerned, majority of the orders come from the government basket.

  • Majority of the work on 2 road BOT projects - Jalandhar Amritsar Tollways Ltd, and Salem Tollways Ltd (commercial operation date of these projects was delayed by a quarter) - has been completed and the commercial operations are expected anytime soon.. The company has achieved financial closure on its Indore-Gujarat road BOT project. At the end of FY10, it has only one project in its kitty awaiting financial closure.

  • Current cash and debt in the books stand at Rs 1.5 bn and Rs 17 bn respectively.

Our View

  • Reduction in exposure to Andhra Pradesh (constituted 28% of the order book in 3QFY10 V/s 17% in 4QFY10) will result in faster execution and ramp up revenue growth as the situation in the state continues to remain unhealthy.

  • Aggressive bidding in other segments can put margins under pressure. Higher dependence on government can also extend the working capital cycle due to possible delays in payments.

  • IVR Prime offers significant value unlocking potential (through land sale) leading to a possible re-rating of the stock.

  • Blended margins are expected to remain steady due to high concentration on water supply and irrigation segment (high margin business) and a decline in interest cost with improvement in working capital cycle in FY11. (Majority of the debt is taken to fund working capital requirements)

Valuations: At the current price of Rs 172, the stock is trading at a multiple of 21.8 times its trailing 12 months earnings. Most of the stocks in the construction space currently trade at around 17-18 times forward earnings. However, adjusted for BOT and real estate projects, these stocks trade at 13-14 times forward earnings. We believe IVRCL deserves to trade at a discount to industry average considering lengthy working capital cycle, low RoE and concentrated order book.

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Aug 30, 2019 (Close)