IVRCL Infra: Profitability is the key - Views on News from Equitymaster

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IVRCL Infra: Profitability is the key

Aug 1, 2006

Performance Summary
One of the leading construction companies in India, IVRCL Infrastructure, declared its 1QFY07 numbers. On a standalone basis, revenues have grown by 43% YoY. Also, operating margins have expanded by 55 basis points YOY. However, higher depreciation charges as well as financing expenses have restricted the bottomline growth to 33%.

Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
Net Sales 2976.56 4265.66 43.3%
Expenditure 2743.42 3908.18 42.5%
EBITDA 233.14 357.48 53.3%
EBITDA margins (%) 7.8% 8.4%  
Other Income 9.76 17.09 75.1%
Depreciation 22.26 38.02 70.8%
Interest 45.19 82.26 82.0%
PBT 175.45 254.29 44.9%
Tax 10.93 36.34 232.5%
PAT 164.52 217.95 32.5%
Net profit margin (%) 5.53% 5.11%  
No of shares (m) 107 108  
Diluted earnings per share*   9.1  
Price to earning ratio(x)   21  
(* Twelve months trailing)

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 1QFY07?
Topline show continues: Water continued to be the biggest revenue contributor as it contributed around 46% to company's gross turnover during 1QFY07. The rest was broken up amongst building, power and roads in the form of 26%, 20% and 8% contribution to gross turnover respectively. As far as order backlog is concerned, at the end of 1QFY07, the company's order backlog stood at an impressive Rs 70 bn. Out of this, water segment contributes to 55% and the balance is distributed between roads (20%), building & structures (9%) and power (16%). By the end of FY07, the company is expecting to have its order backlog swell to Rs 85 bn and another increase of 20% to 25% during FY08. The power segment is likely to emerge as a focus area for the company in the coming years as is evident from its higher contribution to the order book.

Decline in other costs aid margin expansion: The 60 basis point expansions in operating margin was a result of reduced construction and store expenses as a percentage of sales. While all the other cost heads witnessed a rise, the reduction in construction and store expenses was more than enough to offset the rise in other expenses.

Bottomline growth affected by capital and financial expenditure: Despite a 75% jump in other income, growth in bottomline came in at a rate lower than the 53% jump in operating profits. Higher depreciation charge to the tune of 71% and also a jump of 82% in interest payments restricted the bottomline growth to 33% over 1QFY06.

What to expect?
At the current price of Rs 187, the stock is trading at a price to earnings multiple of 21 times its trailing twelve months earnings. 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. However, profitability issues still need to be addressed.

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