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On Firm Grounds

With a number of positives like sustained revenue & strong order book, IVRCL's future looks steady

Profile
IVRCL Infrastructure & Projects operates in high-growth potential sectors like water & environment, transport, buildings and power.

The company started operations in 1990 and established itself as a premier engineering procurement, construction and commissioning (EPCC) and lump sum turn key (LSTK) service provider.

It now ranks amongst the fastest growing, profitable companies in the country in the infrastructure space with sales growth of 44 per cent CAGR (2004-07).

With an eye on expanding into emerging infrastructure sectors like railway infrastructure, metro rail projects and oil and gas sectors, it has acquired Alkor Petroo Limited so that it can take part in exploration activities in Egypt and Yemen. Moreover it has partnered with major corporations to bid for the upcoming projects world over.

Promoter
The company is promoted by E. Sudhir Reddy. Currently he is the Chairman and Managing Director of the company with 3.93 per cent holding of the company.

Rest 5.80 per cent of the promoter holdings are held by various relatives and holding firms of Mr. Sudhir Reddy. The major share holders of the company are FIIs and Mutual Funds, the combined shareholdings by them is over 65 per cent.

Investment Rationale
Revenue Momentum to Sustain
For Q3FY09, IVRCL's revenue was at Rs 11.8 billion, up by 22 per cent YoY. However, PAT went down by 27 per cent to Rs 465 million, led by higher interest charge of Rs 419 million, up by 137 per cent. The company's EBITDA margins of 9.1 per cent were lower by 230 bps due to higher material, labour and staff costs. However, revenue growth is expected to continue with the current order backlog at 3x its FY09E revenue.

Debt Levels to be Maintained
IVRCL has advanced a loan of Rs 2.8 billion to its real estate arm, IVR Prime. The company's total loans and advances to its subsidiaries stands at Rs 4 billion YTD. In FY09E, IVRCL expects to get Rs 0.8 billion back from IVR Prime, of which Rs 0.3 billion have already been received.

However, the company expects to borrow an additional Rs 1 to 1.5 billion, depending on their requirement for project execution. But debt costs are expected to subside in FY10E on the back of internal cash accruals from its core construction business. Further-more, with toll revenue flowing in from its BoT project from 2QFY10E, no significant rise in its debt is expected.

Strong Order Book
IVRCL's order book of Rs 143 billion is at 4x its FY08 revenues and has an average execution cycle of 24 to 30 months. Furthermore, 95 per cent of the company's order book is protected by price escalation clauses.

A major part of the order book (65 per cent) is from the water segment. The balance, 20 per cent comes from buildings and the rest from transportation and power. IVRCL's focus is to secure government contracts. So far this year, the company has managed to secure contracts worth Rs 50 billion and expects to further secure additional contracts worth Rs 17 billion.

Positive Macro Outlook
As per the planning commission, for the 11th five-year plan, spending on water supply and sanitation infrastructure development is pegged at Rs 1991 billion, up by 207 per cent. IVRCL is perfectly positioned with immense domain expertise to gain from this.

Risk & Concerns
Policy Dependence
Number of projects of the company depends on the government. Any unfavourable change in policy environment is going to adversely affect the company. This high dependence on a single client increases the operating risk of the company.

Working Capital
IVRCL's working capital needs are expected to remain high over the next few years in order to support its top-line growth. As a result, we believe that the operating cash flow would remain negative. Con-sequently the company would need to borrow to fund its working capital requirement. Hence there is a good chance that the current debt-equity ratio is going to deteriorate in coming times.

Valuation
At CMP of Rs 110, IVRCL's stock trades 6x of the FY10E EPS. The company has been valued to arrive at a target price of Rs 132.

Even though the economic growth is slowing down, but due to the water-related infrastructure focus of the company, the order book of the company is going to remain robust in the coming times. After the hammering it got in 2008 the stock looks well poised for an upside.



Financials
  FY06  FY07  FY08  9 Mths*
Net sales (Rs Cr) 1,491 2,293 3,646 3,255
PAT (Rs Cr)  93 141 210 147
Operating profit (Rs Cr)  93 160 240 280
Interest payments (Rs Cr) 30 48 91 92
Borrowings (Rs Cr) 679 556 1068 -
Ret on networth (%) 25 16 15 -
Ret on cap employed (%) 26 23 28 -
* FY09