IVRCL Infra.: 'Power'ful growth! - Views on News from Equitymaster

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IVRCL Infra.: 'Power'ful growth!

Jun 12, 2006

Performance Summary
One of the leading construction companies in India, IVRCL Infrastructure, announced strong results for the fourth quarter and fiscal ended March 2006. On a standalone basis, revenues have grown by 42% YoY. Also, operating margins have expanded by 80 basis points. Combined with this, a higher other income has helped the company grow its net profits at a stronger rate of 64% YoY.

Financial performance: Standalone snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net Sales 3,490 5,906 69.2% 10,547 14,957 41.8%
Expenditure 3,152 5,348 69.7% 9,682 13,614 40.6%
EBITDA 338 558 64.9% 865 1,343 55.3%
EBITDA margins (%) 9.7% 9.4% 8.2% 9.0%
Other Income 7 43 528.1% 24 57 138.4%
Depreciation 22 36 63.2% 80 110 37.1%
Interest 50 49 -1.7% 214 253 18.2%
PBT 273 516 88.8% 595 1,037 74.4%
Tax 22 78 259.1% 28 108 290.4%
PAT 252 438 74.1% 567 930 63.9%
Net profit margin (%) 7.2% 7.4% 5.4% 6.2%
No of shares (m) 16.9 107.0 16.9 107.0
Diluted earnings per share 8.7
Price to earning ratio 23.6

What is the company's business?
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. Of late, it has emerged as a major player in water transmission, treatment and wastewater management, and the company is also known for its desalination drive. Beside this, the company is also into the business of constructing buildings and industrial structures. IVRCL earns over 60% of its revenues from water and water related projects. 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.

What has driven performance in FY06?
Power segment drives topline: Strong accretion to the order book helped IVRCL post a robust growth in topline during FY06. At the end of March 2006, the company's order backlog stood at an impressive Rs 62.5 bn, which is almost four times its total sales in FY06. Out of this backlog, the water segment contributes to 50% and the balance is distributed between roads (27%), building & structures (16%) and power (7%). Further, the management expects the order backlog to grow by 35%-45% in FY07. The company has especially stressed on its increasing focus in the power segment, whose contribution to the company's topline has increased from 3% in FY05 to 21% in FY06. In this segment, IVRCL has benefited from the government's thrust on improving the rural power situation through its Rajiv Gandhi Grameen Vidyutikaran Yojana.

Decline in other costs aid margin expansion: IVRCL has reported 80 basis points (0.8%) expansion in margins during FY06. This has been mainly brought about by a decline in other expenses, from 29% of sales in FY05 to 22% in FY06. In comparison, the company's construction costs have increased from 38% of sales in FY05 to 45% of FY06 sales, thus paring the gains from lower other costs.

Bottomline benefits: Apart from the expansion in operating margins, higher other income has also helped IVRCL grow its bottomline at a better rate than the topline. The strong growth in net profits is despite higher depreciation and tax expenses.

What to expect?
At the current price of Rs205, the stock is trading at a price to earnings multiple of 23.6 times its FY06 earnings. The board has recommended a dividend of Re 1 per share (dividend yield of 0.5%). While we are enthused by the company performance on the topline front, we remain concerned about the profitability levels. IVRCL, like its peers, has focused on a volume driven approach to growth in the past two years, thus sacrificing profitability. This, we believe, shall continue in the future as well with more and more players (from diverse industries) jumping into the infrastructure construction fray. However, the focus on BOT based projects shall help manage this issue of low profitability. The stock has witnessed a sharp correction in the recent decline (37% decline since the start of May), thus bringing valuations to reasonable levels.

We are in the process of initiating our research coverage on IVRCL and shall soon update our subscribers with a view on the stock.

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