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IVRCL Infra: Conference call extracts - Views on News from Equitymaster

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IVRCL Infra: Conference call extracts

Sep 2, 2010

IVRCL announced its 1QFY11 results recently. Overall the results were a big disappointment. Top line was flat YoY mainly due to execution worries persisting in few of the projects. According to the management, inadequate drawings lead to execution delays and revenue losses of Rs2.5 bn for the quarter. Nevertheless, the company is confident of ending the year with top-line in the region of Rs 67.5-70bn. This appears to be challenging as IVRCL has to clock in revenues in the range of Rs 20bn a quarter to meet the top end of the guidance. But considering that 2/3rd of the company’s revenues accrue in the 2nd half - typical industry phenomenon - achieving the guidance should not be a difficult proposition. Expected revenue recognition from the delayed projects will further aid outperformance in 2HFY11. Our expectation for the revenues is above the top end of the guidance as we believe that the execution worries are a one off blip and the company should be able to pick up execution in the second half of the fiscal.

The current order book of the company stands at Rs 232 bn with an order inflow of Rs 40 bn for the quarter. The company expects to end the year with an order book position of Rs 250-260 bn. The breakdown of the order book and sales for the quarter ended June 2010 is as follows:-

Order Book Break down
Segment As a % of Order Book
Water 43%
Buildings 14%
Power 6%
Transportation 31%
Oil & Gas 3%
Revenue Break down
Segment As a % of Sales
Water 50%
Buildings 24%
Power 2%
Transportation 14%
Oil Gas 10%

Working capital cycle concerns a temporary phenomenon:-
The working capital cycle of the company shot up significantly during the quarter. This was mainly due to build up in receivables and inventories coupled with decline in current liabilities. As a result of expansion in the working capital cycle, the debt of the company increased to Rs 22 bn in 1QFY11. This led to higher interest outgo during the quarter. However, we believe once the execution concerns settle down, working capital cycle should ease in the future. As far the Andhra Pradesh (AP) situation is concerned, the company is focusing on execution rather than fresh bidding. AP contributes 16% to the overall order book and the balance receivables from the state are pegged at Rs 180 m.

Update on BOT projects:-
Out of the total BOT asset portfolio of about Rs 100 bn, two projects namely Jalandhar Amritsar Tollways Ltd and Salem Tollways Ltd have commenced operations during the quarter. The company also commenced operations on the Chennai Water desalination plant yielding revenues of Rs 5.3 m/day. Total revenue from the BOT projects currently stand at Rs 8.5 m/day which is expected to reach Rs 10 m/day by the end of FY11. Total equity invested in these projects stands at Rs 7.2 bn with pending equity infusion of Rs 13.8 bn over the next 3-4 years. The company plans to double the size of its BOT portfolio over the next 3-4 years.

Our view:
Due to the poor show put up during the quarter and general weakness persisting in the construction sector, the stock has lost some ground over the last few trading sessions. Although the first quarter was a big disappointment, we expect execution to pick up during the subsequent quarters. Margins are expected to remain in a tight band of 9-10%. However, interest concerns resurfaced in 1QFY11 considering the expansion in working capital cycle. Nevertheless, we prefer a wait and watch approach till the year end as the expansion in working capital during the first quarter was uncharacteristic (delays in revenue recognition). At the current levels, the stock trades at 12 times forward earnings and we maintain our positive view on the stock.

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