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IVRCL: Interest costs wipe out profits

Sep 6, 2012

IVRCL announced its results for the quarter and period ended June 2012. During the quarter, the company's total income grew by 7% YoY, while it reported a loss of Rs 60 m. Here is our analysis of the results.

Performance summary
  • Total income increases 7% YoY during the quarter ended June 2012.
  • Operating profits rise by 45% YoY during the quarter as margins expand by 2.7% YoY.
  • Company reports a net loss of Rs 60 m during the quarter ended June 2012.
  • The current order book of the company stands at approximately Rs 270 bn (including L1 orders of Rs 20 bn). The company received orders worth 39 bn (net order inflow) during quarter.

Standalone financial snapshot
(Rs m) Qtr ended June 2011 Qtr ended June 2012 Change FY11 15mFY12^ Change
Income from operations 11,219 11,915 6.2% 56,174 61,510 9.5%
Other operating income 24 155 558.7% 341 269 -21.0%
Total income 11,243 12,071 7.4% 56,515 61,780 9.3%
Expenditure 10,387 10,830 4.3% 51,369 56,768 10.5%
Operating profit (EBDITA) 856 1,241 44.9% 5,146 5,012 -2.6%
Operating profit margin (%) 7.6% 10.3%   9.1% 8.1%  
Other income 245 452 84.7% 565 1,696 200.0%
Interest 824 1,376 67.0% 2627 5,055 92.4%
Depreciation 228 214 -5.8% 758 1,189 57.0%
Profit before tax 49 102 109.4% 2,326 462 -80.1%
Tax 7 162 2342.5% 747 282 -62.3%
Profit after tax/(loss) 42 (60)   1,579 181 -88.6%
Net profit margin (%) 0.4% -0.5%   2.8% 0.3%  
No. of shares (m)#         306.9  
Basic earnings per share (Rs)         0.5  
P/E ratio (x) *         86.3  
* On a trailing 12-months basis; ^ 15 month period ended June 30, 2012;
# Shares outstanding post merger.

What has driven performance in the quarter ended June 2012?
  • IVRCL reported a top line growth of 7% YoY during the quarter ended June 2012. The revenue break up during the quarter stood as water - 32%, buildings - 20%, roads - 37%, power - 8% with the balance being contributed by others. At the operating level, IVRCL's operating profits expanded by 45% YoY on the back of lower construction, raw material and employee expenses (as a percentage of sales). Operating margins stood at 10.3% during the quarter as compared to 7.6% margins during the corresponding quarter last year. Higher interest costs and a higher tax outgo led the company to post a net loss of Rs 60. This was despite the company reporting a substantially higher other income. As per the company, the other income included a figure (seemingly a gross figure) of about Rs 1.2 bn on account of profits on sale of road project.

  • It may be noted that the quarterly results are not comparable due to the merger of IVRCL Assets and Holdings with the parent company, IVRCL Infrastructure. The IVRCL Group underwent a restructuring in which all SPVs of IVR Assets and Holdings were acquired by IVRCL. Shareholders of the latter would receive 39.9 m equity shares of IVRCL.

  • IVRCL ended the year FY12 (15 month period ended June 2012) on a poor note with a revenue growth of 9% YoY. However, on the back of just 1% YoY margin expansion, the company's operating profits were lower by 3% YoY during the year. Despite other income trebling, the magnitude of the interest cost (also due to the merger process and changes in accounting policies) was enough to cause an 89% YoY decline in profits for the full year.

What to expect?
At the current price of Rs 39, the stock is trading at a P/E multiple of about 86 times its TTM standalone earnings per share. At the end of the quarter, IVRCL's order book stood at Rs 271 bn (which includes L1 projects worth Rs 20 bn) with water forming 35% of the order book and buildings (20%), road EPC (9%), road BOT (25%), power (7%) and others (balance) contributing the rest.

IVRCL has reached where it seems desperate at strengthening its balance sheet and is going aggressive on asset sales. The company sold stake in one of its BOT project during the quarter and is looking at doing something similar in the future. It is looking at selling stake in about four more road BOT projects which would help it raise nearly Rs 4 bn to Rs 5 bn. However, an area of concern is that the company is yet to infuse equity of about Rs 11 bn (over the next two to three years) in other projects for which it would require funds in the future. IVRCL is also looking at selling its land bank (although at a later stage, once the prices meet its expectations) across different cities.

On a broader level, we believe the key concerns remain execution. While the company has built up a massive order book, the only thing that matters is that it executes projects fast and profitably. Company has targeted operating margins in the range of 9% in the future.

Keeping reasons such as monetization and the lower valuations (TTM EPS is not comparable), we believe investors can hold on to the stock from a long term perspective. We would change our view if any major let downs come from the company's side in the future.

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Aug 30, 2019 (Close)