IVRCL Infrastructures and Projects

Strong presence in the ever-green irrigation space, recent entry into power transmission and a renewed focus on road projects argue for investing in the stock of IVRCL Infrastructures and Projects (IVRCL). Investors with a two-three-year perspective can consider buying the stock.

The company’s earnings growth is likely to receive support from BOT projects that are nearing completion. Given the high FII holding in the stock, it may be subject to steep declines during market sell-offs. Investors can consider such opportunities to accumulate the stock. At the current market price of Rs 344, the stock trades at 14 times its expected per share earnings for FY-11.
Renewed focus on BOT

IVRCL, through a 100 per cent subsidiary, holds complete stake in four BOT projects — three road and one water desalination project. All these projects are in the advanced stages of completion and at least two of them are likely to start yielding revenue from the last quarter of FY-10.

This would not only mean higher revenue growth but good payback on significant equity sunk into these projects over the last two-three years.

IVRCL’s not-so-pleasant experience (in terms of delays) in a couple of the road projects resulted in the company toning down its enthusiasm for road BOT projects and instead concentrating on cash contract projects in this segment.

However, after the recent assurances by the Transport Minster to make road projects more ‘investor-friendly’ and to remove ‘irritant clauses’, IVRCL now appears more confident to renew its activity in this space. As the company is pre-qualified in this space, it is in the process of bidding for some projects.

It is, however, treading with caution, and does not want to sink too much equity; the management has stated that it would look at bidding for projects of Rs 500-800 crore instead of larger ones of, say, over Rs 2,000 crore.

We view this move as a favourable one for the following reasons: One, given the 7,000 km per year target in the road space, IVRCL’s non-participation would have meant missing out on the sheer volume growth that this space has to offer for players across the spectrum.

Two, with the various clauses in the bidding process and concession agreements recently sorted out, IVRCL’s may be timing its entry well. Three, the company’s cautious plan of bidding for smaller projects, would mean higher chances of qualifying in bids (as many of the larger players have stated their intention of concentrating on only large projects) and ploughing limited equity. This would leave the company to focus its resources on its crucial segment — irrigation and water.

Therefore, capitalising on the huge opportunity in roads, without diluting focus on its key area appears to be a good medium-term strategy.

IVRCL has continued to leverage on its strength in irrigation, what with this segment accounting for close to 70 per cent of the current order book of about Rs15,000 crore (3times FY-09 revenues). While Andhra Pradesh continues to account for 30 per cent of the total order book, the company has irrigation orders in the west and north as well. This segment is likely to buttress the profit margins of the segment.
Muted June quarter

Operating profit margins are nevertheless likely to remain muted in the less-than-10 per cent range in the medium-term, as a result of the company’s less-lucrative projects taken up in the power transmission space, more for pre-qualification purpose.

Higher up the learning curve, IVRCL may improve profitability in this segment.

Despite maintaining momentum in revenue growth through a difficult year (FY-09), IVRCL’ revenue for the first quarter of FY-10 expanded by only 17 per cent over a year ago numbers.

This is lesser than the growth in the previous four quarters.

During the Central and State Andhra Pradesh elections, the company is stated to have deliberately cut down on execution as it anticipated delays in payments, as a result of any change in government.

The management indicated that revenue would have been higher by another 20 per cent (from the June quarter revenue of Rs 1,104 crore) but for the slower pace of work.

While this may have been a prudent measure, given the company’s tight working-capital position, it is also a reflection of how political change is viewed by the corporate sector.

Nevertheless, the business opportunity for IVRCL is only heightened by the irrigation-friendly Andhra Pradesh Government once again coming to power.

Faster debtor recovery from this State government may, however, pose some concern, given the burgeoning state deficit.

via BL