IVRCL INFRASTRUCTURE

Recommended Buy Price 112.05
PN Vijay, Portfolio Manager
Report Dated: Jan 19, 2009


Company Profile:
IVRCL operates in infrastructure sectors namely Water & Environment, Transportation, Buildings and Power. It has a large client base, which includes public sector clients (ONGC, BHEL, IOC etc), private sector clients (Birla Institute of technology, Tata projects, Jindal Steel & Power) and Central and State Govt. clients (Airport Authority, Indian Railways, Ministry of Defence etc). Its operations cut across geographical frontiers of the sub-continent, with headquarters in Hyderabad and administrative offices in Chennai, Cochin, Bangalore, Pune, Kolkata, Jodhpur, Chattisgarh, Ahmedabad and Goa.

Construction Sector:
Construction is the second largest economic activity after agriculture in India. Construction sector can be classified into three segments: -

1. Real Estate: The sector has suffered a meltdown in 2008 due to high interest rates and demand destruction. However we believe it will improve in the coming months due to the decrease in property prices, falling interest rates on home loans and favorable tax treatment.

2. Infrastructure: This constitutes roads, water, ports, airports, freight corridor, power, etc. Investment in the infrastructure is robust and is at the center of the various stimuli that the Government is offering.

3. Industrial Construction: This constitutes sectors like steel, textiles, fertilizers, and oil and gas refineries. This is where the maximum fall in demand is taking place and worries remain.

Construction sector uses raw materials like steel, cement apart from using large working capital. The stock prices of leading companies dropped by an average 84% for the 6-months to early September 2008 due to the credit crises, slump in the housing market, increase in the prices of construction material, increase in rate of interest and increase in the prices of oil. But due to the decrease in interest rate, inflation and cut in the prices of steel, the sector is beginning to gain strength and deserves an upgrade.

Financial Position:
For the FY’08 the Net sales increased by 54% to Rs 3867 crore from Rs 2506 crore. The company derived Rs 3693 crore of its revenues from Engineering and Construction and about Rs 259 crore from Real Estate in the FY’08. The EBITDA also showed an improvement by 91.5% to Rs 572 crore. The Net profit registered a growth of 74% to Rs 283.4 crore from Rs 163 crore.

For the second quarter of FY’09 the net revenue increased by an impressive 65% to Rs 1137 crore, due to faster execution of projects. The EBITDA grew by 69% to Rs 91.28 crore. The net profit showed an excellent improvement by 90% to Rs 67 crore from Rs 35.25 crore. This was due to high revenues and lower tax rate. Interest cost however more than doubled during the quarter due to high borrowings. The order booked during the second quarter FY’09 was worth Rs 2586.6 crore and backlog of orders during the same period was worth Rs 13,800 crore.

The total net worth in FY’08 increased to Rs 2480 crore. The company also has stock options worth Rs 1 crore. The secured and unsecured loans, which the company has, were worth Rs 1725 crore. On the asset side a major portion consisted of current assets. The Debt/Equity ratio as on 31st Mar 08 stood at 0.66.

During the year, some of the Foreign Currency Convertible Bond (FCCB) holders have exercised their option of converting their bonds into equity shares. Till the date of the Balance Sheet, amounts aggregating to US $ 18.10 million worth of bonds were converted into 3,545,284 equity shares of the face value of Rs.2 each. Rs 7.1 crore has been debited to the Profit and Loss account during the year towards foreign exchange translation difference on Foreign Currency Convertible Bonds and deposits in foreign currency.

Subsidiaries:
IVRCL’s major subsidiaries are:-

IVR prime Urban Developers Ltd: IVR Prime is dedicated to creating luxury-intensive urban infrastructure. Its net profit for the FY’08 increased by a spectacular 750% to Rs 176 crore from Rs 20.6 crore in FY’07.

Hindustan Dorr-Oliver Ltd (HDO): Hindustan Dorr Oliver Limited (HDO) is an Indian EPC company having its core business activities in providing Engineered Solutions, technologies and EPC installations in Liquid-Solid Separation applications. The company’s core business focus is on Water Management. Its net profit for the FY’08 increased by 47% to Rs 22.64 crs. Sector wise order booked in FY 2007-08 accounts for 54% in environment, 27% in minerals, 14% in fertilizers and 5% in pulp and paper. IVR Prime and HDO are listed subsidiaries on NSE.

Chennai Water Desalination Ltd: Executing the most prestigious contract of Chennai Sea Water Desalination Plant Project at Minjure, Chennai.

Alkor Petroo Ltd: is a Hyderabad based subsidiary of IVRCL engaged in Oil & Gas Exploration & Production. It has an association with Gujarat State Petroleum Corporation Ltd (GSPCL).

Investment Positives:
IVRCL has a very strong order book, making it an attractive investment. The order book remains extremely healthy at Rs 15500 crore. Recently the company bagged a few more orders, latest being from Bangalore Metro Rail Corp, IOC and Karnataka Water Supply Board in the first week of Jan 09. This will inflate the order book to a massive Rs 16000 crore approx. It has the best Order book to Turnover ratio in the industry. Also, NHAI has been going slow on orders in the last two years and it is expected to complete orders for more than 6000 kms in the one or two months- thrice the orders placed in 2007-08. IVRCL is expected to be one of the biggest beneficiaries of this.

Steel companies announced a price cut during Sep 2008, which will help reduce the cost of material for construction companies. The price of the cement is also expected to ease in the future. This will shore up margins considerably.

Decreasing rates of interest and easing inflation is bound to create a positive impact on the construction companies. With the decrease in rate of interest the cost of borrowing has reduced to a great extent, making the condition favorable for taking more debt to finance the projects.

Mid cap stocks such as IVRCL are exposed to infrastructure segment, which is expected to grow in the coming future. India, which is Asia’s 3rd largest economy, is in need of greater infrastructure spending for the next 10 years for economic expansion. India has allocated huge expenditure for the building of airports, highways and for the Commonwealth Games in 2010.

Concerns:
Any delays in implementation of the projects undertaken by the company may affect its profitability.

For more funding requirement the company has to depend on leverage, which will cause increase in the rate of interest to be paid on debt. Increasing interest costs may have a dampening affect on the profits.

There is a risk that the government could change certain regulations for the construction sector. The biggest threat relates to availability of 80IA benefit to construction companies. IVRCL has got an award from IYAT in this regard. We believe the government is not likely to enact unfavorable regulations for the sector given the present environment.


The table clearly places IVRCL as one of the most attractive bets in the Construction space. The company is growing at a phenomenal pace (change in Net profit of 74%) vis-à-vis its competitors and boasts of some fantastic orders in its kitty.

Valuation:
IVRCL has shown a good financial performance for the FY’08 and for the second quarter FY’09. The company has a strong order book and currently it is undervalued, making the stock a good investment. In our view it is one of the best plays in the Indian infrastructure. We recommend the stock as with a target price of Rs 250.