[T.S.R:16720] IVRCL Infra-Testing Times (Sell)

IVRCL's equity requirement of Rs14bn for mobilizing the recently bid IVRAH road projects (constitutes 23% of IVRCL's order book) is making an equity dilution/raising at the subsidiary level inevitable. Execution disappointments vis-à-vis aggressive guidance is expected to continue in the near term leading to further declines in PBT margins. We reiterate our SELL stance on IVRCL whilst noting that the recent stock price decline limits shareholders' downside from the current levels.

Valuation, Recommendation and Outlook We do not expect standalone operations to turn FCF positive up to FY13 on account of poor working capital and gross block turnover, despite marginal improvements in PBT margins.  Poor cashflow profile and likely dilution of subsidiaries at distressed valuations can lead to further declines in multiples.

 

IVRCL stock is down 24% over the last three months (in line with the sector) due to execution delays, worsening working capital turnover and rising equity needs. Despite relatively poor share price returns over the last five years, IVRCL's stock is one of the most hyped in the sector given its industry leading revenue growth rate over FY05-09 (CAGR 47%) and dominance in the promising water-related segments. Whilst we believe that its long-term growth can be better than its recent  performance, the stock price may see further (albeit modest) declines before investor returns can be generated. 

Key Investment Drivers 

Nearly 40% of the order book is facing execution challenges: Whilst IVRCL has one of the largest order books in the sector and a high book-to bill ratio (4.5x), nearly 40% of the Rs240bn order book is facing execution issues (Rs40bn of irrigation orders and Rs55bn of captive orders). We believe such slow moving orders make the situation worse for IVRCL at a time when the industry is facing slow execution across other sectors. We expect 2HFY11E revenues to grow 19% YoY, implying 13% YoY growth for FY11.

Equity raising — important and difficult: IVRCL was among the first construction companies to raise equity in the early years of the noughties followed by a couple of equity raisings at the parent and the subsidiary levels (total equity raisings of Rs10bn over FY04-08). However, over the last few quarters, the company has been facing the lack of capital given the rising debt-equity and the increasing need of equity for mobilizing the recently bagged infrastructure assets. Lack of capital has led to regular delays in booking construction revenues from captive contracts. 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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