Margins for IVRCL are dependant on: 1) mix of order book based on business segments – complex jobs earn better margins, 2) commodity costs based on the mix of order book on fixed price vs cost pass-through contracts, 3) working capital cycle and 4) gearing.
Operating margins for IVRCL declined during FY04-05 on account of increase in steel prices and high share of low margin transportation segment orders. Margins improved during FY06-08 as IVRCL increased the share of high margin irrigation and power transmission orders. Margins during FY09 fell sharply led by 15% increase in working capital cycle, mainly on account of the credit crunch led by global economic downturn, impacting its ability to execute projects. However, operating margins have bounced back to about 9.4% in FY10.
The core construction business of IVRCL is extremely competitive, which results in IVRCL earning margins similar to that of its peers.
We believe that margins have peaked for IVRCL given the competitive nature of the business. We expect operating margin for the company to be in the narrow range of 9.5-10% and expect its net profit margin to be around 4%.
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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