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IVRCL: A forgetful quarter - Views on News from Equitymaster

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IVRCL: A forgetful quarter

May 16, 2012

Iragavarapu Venkata Reddy Construction Limited (IVRCL) announced its results for the quarter (4QFY12) and period ended March 2012. During the quarter, total income declined 22% YoY, while bottom line fell by 92% YoY. Here is our analysis of the results.

Performance summary
  • Total income declined by 22.2% YoY during 4QFY12 due to the prevailing execution issues.
  • Operating profits declined by 42% YoY in 4QFY12 due to poor performance at the top line front and rising input cost. The company reported operating margins of 6.4% in 4QFY12 compared to 8.6% in 4QFY11.
  • Net profits declined 92.3% YoY in 4QFY12 due to a poor performance at the operating level, coupled with higher depreciation charges as well as a relatively higher tax outgo.
  • The current order book of the company stands at approximately Rs 277.9 bn (including L1 orders). It received orders worth 105.2 bn (net order inflow) during the twelve month period ended March 2012.

Standalone financial snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 12mFY12^ Change
Income from operations 20,520 15,960 -22.2% 56,174 49,595 -11.7%
Other operating income 6 20 218.6% 341 114 -66.6%
Total income 20,527 15,980 -22.2% 56,515 49,709 -12.0%
Expenditure 18,756 14,950 -20.3% 51,369 45,938 -10.6%
Operating profit (EBDITA) 1,771 1,030 -41.9% 5,146 3,771 -26.7%
Operating profit margin (%) 8.6% 6.4%   9.1% 7.6%  
Other income 58 55 -5.1% 130 184 41.3%
Interest 661 661 0.0% 2192 2,620 19.5%
Depreciation 217 269 23.7% 758 975 28.7%
Profit before tax 950 154 -83.8% 2,326 360 -84.5%
Tax 308 105 -66.0% 747 119 -84.0%
Profit after tax/(loss) 643 49 -92.3% 1,579 241 -84.7%
Net profit margin (%) 3.1% 0.3%   2.8% 0.5%  
No. of shares (m)         267.0  
Basic earnings per share (Rs)         0.9  
P/E ratio (x) *         52.2  
* On a trailing 12-months basis; ^ Board has decided to extend the financial year by three months.
Therefore, the annual accounts of the company will be prepared for a period of 15 months ended June 30, 2012 for this year.

What has driven performance in 4QFY12?
  • IVRCL's top line declined by 22.2% YoY during 4QFY12. As per the management, execution delays on certain large sized orders have been the key reason. These include an order for the National Automotive Testing and R&D Infrastructure Project which was originally sized at Rs 4.5 bn. However, due to issues related to consultants and the scope of working changing, execution of the same has been delayed. The same goes for three balance of plant (BoP) projects that were awarded from National Thermal Power Corporation (NTPC).

  • IVRCL's operating profits declined by 42% YoY on the back of the company delayed execution coupled with higher other expenses. It must be noted that during the quarter ended March 2012, the company made a provision of Rs 500 m on bad debts. However, the management has confirmed that it would receive the payments since the arbitration for the said amount went in favour of the company. On excluding this, the company operating margins would have been in the range of 9%. During the quarter the operating margins declined to 6.4% as compared to 8.6% last year.

  • IVRCL's net profits were almost wiped out this quarter, falling by 92.3% YoY. A dismal operating performance, coupled with higher depreciation charges led to the fall in profits. In addition, a higher tax outgo also played spoilsport for the company.

  • It may be noted that the company's Board has decided to extend the financial year by three months. Therefore, the annual accounts of the company will be prepared for a period of 15 months ended June 30, 2012 for this year.

What to expect?
At the current price of Rs 47, the stock is trading at a P/E multiple of 52.2 times its TTM earnings per share. The current per share value of the two listed subsidiaries (including a holding discount of 20%) stands at about Rs 21, which is around 45% of IVRCL's current market price. Thereby, the value of the standalone operations is about Rs 26.

IVRCL's standalone EPS declined to Rs 0.9 in 12 months ending March 2012. The average EPS earned by the company over the last six years (including FY12) is about Rs 11 per share. Clearly, FY12 has been a very bad year for the company. But given the nature of the construction business, execution delays and the one time provision made by the company- all this in one year - we believe that the scenario cannot get much worse from here on.

We expect IVRCL's operating performance to improve significantly going forward. A lot of it depends on execution of projects. It may be noted that the execution rate was the slowest in FY12 in many years. Also, considering that these delays were from the client's side (as per the management), such factors remain out of the control for IVRCL. We believe the healthy order book of Rs 278 bn provides strong revenue visibility into the future. Nonetheless, considering the current execution issues and higher interest rate environment we maintain our "Hold" view on the stock.

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