[T.S.R:18021] IVRCL Infra-Merger Blues; SELL

IVRCL Infra's revenue was down 3% y‐o‐y for the Sep11 quarter – continuing the downtrend in growth seen in the past two quarters. Interest/revenue stood at 6.2%, leading to PAT margins of just 0.8%. A couple of large orders led to a large uptick in order inflows, which are unlikely to be sustained. Borrowings are up 26% since Mar11. We cut our FY12f‐FY14f EPS by up to 54%, factoring in weaker execution and higher borrowing costs. A merger with its subsidiary may led to increase in balance sheet exposure to real estate and BOT assets.

 

High gearing, a further increase in interest rates and a prolonged decline in the investment rate are the key risks.

 

Large shrinkage in PAT margin as interest/revenue climbs to 6%

 

Execution problems continued as revenue declined by 3% y‐o‐y in the Sep11 quarter. The revenue growth trajectory continued to head south for a third consecutive quarter. EBITDA margins recovered sequentially to their normal range, while interest costs continued to climb and stood at 6.2% of revenue for the quarter – the highest in at least the past eight years. PAT margins stood at 0.8%, after a lower tax rate. Borrowings have increased by 26% since Mar11, mainly on account of INR3bn of incremental loans and advances to subsidiaries

and lower liabilities as the credit period declined on account of vendors facing working capital problems.

 

Cut EPS forecast by up to 54%; real estate business risk continues

 

The board has approved a merger ratio of 5 shares of IVRC for 6 shares of IVRCL Assets and Holdings (IVR IN, NR) ‐ the merger effective from 1 April, 2011. While the real estate assets will continue to remain under a separate entity, a 100 acre land parcel in Noida (net INR3.2bn investment) would come under IVRCL post merger. The merger may ease the funding for the real estate business. While the management expects the merger to be earnings neutral for IVRC on standalone basis, any future needs for balance sheet support to the real estate business would increase the risks to construction business earnings IVRC expects to sell the Noida land and reduce debt by a significant amount by Mar12.

 

As at Sep11, IVRC has given total loans and advances of INR8.3bn to IVRC (up by INR3bn since Mar11). We cut our FY12‐FY14 EPS forecast by up to 54%, assuming slower execution and higher borrowing costs.

 

Cut to Sell with Sep12 TP of INR 15

 

High gearing, a further increase in interest rates, a prolonged decline in the investment rate, sharp increase in commodity prices and an

increase in competitive pressures are the key risks. Pending final contours of the merger and its impact on earnings may act as an overhang for the stock valuations.

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