IVRCL Infrastructures

IVRCL’s sustained growth in order book, strong financial performance despite some pressure from higher cost of borrowings and leadership in the irrigation space shore up its growth prospects. Investors can consider accumulating the stock of IVRCL Infrastructures and Projects with a three-year perspective. Consider buying the stock in small lots on declines linked to the broad market.

The company’s price-earnings multiple of about 6.5 times its expected stand-alone earnings for FY-10, makes it one of the most attractive candidates in the listed infrastructure space.

Advantage irrigation

IVRCL is among the few construction companies that has shown resilience in the current economic slowdown. The company’s dominating presence in the irrigation segment is one of the key reasons for this hardiness.

The company has, therefore, remained one among the few players that has not witnessed any slowdown in the order book. The irrigation spends by States have not seen any significant slowdown until now, thanks to the political sensitivity in lowering the spending in this sector. IVRCL has, in recent times, bagged one of its biggest lift irrigation projects in Andhra Pradesh valued close to Rs 900 crore. With this, its total order-book stands at about Rs 15,000 crore — four times its revenue for FY-08.

The stream of order flows has also resulted in other companies such as Patel Engineering and Hindustan Construction increasing their focus on the sector.

Andhra Pradesh, one of key States with high irrigation spends, is said to have utilised over Rs 38,000 crore on irrigation projects over the last four years, that too without resorting to market borrowings so far. However, the State appears to be facing some fund constraints in recent times; there are reports of the State government’s plans to raise Rs 14,000 crore of debt for spending in irrigation projects.

The government, however, plans to continue with its new projects, what with the Cabinet recently approving Rs 38,500 crore worth of irrigation projects in the State. This being the case, the irrigation sector may witness steady order flows but with limited funds to utilise, thus bearing a risk of slowdown in execution. A similar limitation could also affect the Centre’s irrigation spending under the Eleventh Plan (2007-12).

This said, the slowly easing liquidity situation could well bring back the much-needed cash into the coffers of the spenders. Hence, while there could be some short-term slowdown in the execution of irrigation projects, this is unlikely to affect the plans over the long term.

IVRCL, for its part, has managed to so far execute its projects as per schedule, albeit at the expense of a steep increase in borrowing costs. The execution of projects and translation into revenues has also kept pace.

IVRCL’s financial performance for the half-year ended September 2008 — a 52 per cent growth in sales and 36 per cent growth in net profits — places the company among the top growing large infrastructure companies in the first half of 2008. The company has also recently issued redeemable non-convertible debentures worth Rs 200 crore to LIC to meet capex and working-capital requirements.
Risk mitigation

Aside of irrigation, IVRCL’s integrated business in water supply and sanitation and its continued presence in building contracts has ensured bagging of small, but regular, orders in other areas as well.

Of its total order-book, 65 per cent come from water projects, 17 per cent from buildings, 10 per cent from power and the balance from road and other projects.

IVRCL’s 51 per cent subsidiary, Hindustan Dorr Oliver (which has also witnessed strong growth in 2008), has enabled IVRCL to broaden its presence in other integrated water-related projects. Similarly, IVRCL has not lost focus on construction contracts.

It has recently procured orders worth Rs 750 crore for construction of various housing and commercial buildings.

This segment of contract work, although not necessarily superior in terms of profit margins, certainly reduces the risk profile associated with the role of a ‘developer’ and provides support on the volume front.

IVRCL has also moved to new fields such as oil and gas exploration. To grow in this business, the company, in late 2007, acquired Alkor Petroo, a local company that shares five exploration blocks with Gujarat State Petroleum Corporation and others in Yemen and Egypt.

The acquisition, for a consideration of Rs 6 crore, can be viewed as a small investment rather than a primary business integration strategy.

The company’s interest in another line of business, marine mining works, that includes micro tunnelling, could, however, hold much promise as the field is still at a nascent stage in the country.
Resilient margins

IVRCL’s operating profit margins for the quarter ended September 2008 (at 7.8 per cent) has withstood testing times arising from commodity price hikes.

A good 90 per cent of contracts protected by price variation clauses helped sail the rough tide.

The company was not, however, as lucky on the net profit margin front with NPMs showing a mild decline to less than 5 per cent in the above quarter. The margin dip does not appear bad for a company whose interest cost increased five-fold.

On the debt front, IVRCL has managed to keep its gearing ratio comfortable at less than one.

While the recent debenture issue would lever up the ratio, IVRCL’s capital requirement for BOT projects is relatively low compared to peers such as Nagarjuna Construction or Hindustan Construction. As a result, the debt is likely to aid revenue growth sooner than later.