Investment counter: IVRCL Infrastructure

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IVRCL Infrastructure, a leading player in the construction space with projects spanning segments like water, irrigation and road, posted disappointing results for the June quarter during market hours on Tuesday. While sales fell by a marginal 0.2 per cent due to delays in three major projects, net profit was down 21 per cent. Not surprisingly, the stock fell 10.3 per cent over two days and closed with a small gain of 1.3 per cent on Thursday.

Execution concerns
Its Rs 75-crore NATRiP projects and the Tankage project in Madhya Pradesh were delayed due to the release and approval of project designs. Additionally, a slowdown in execution as a result of delays in payments for its projects in Andhra Pradesh (AP) have contributed to flat growth in revenue in the quarter. Operating margins may have improved marginally but, as other income dropped 77 per cent and interest outgo surged 17.6 per cent to Rs 45.29 crore, the company reported a 21 per cent fall in the net profit.

Strong visibility
Considering its order book, which stands at Rs 23,300 crore, or over four times its 2009-10 sales, there is a strong revenue visibility, which could drive revenue growth for the next two-three years. Positively, the company has also been able to bring down its exposure to AP from 35 per cent of the order book in 2008-09 to 17 per cent currently, which should help alleviate concerns over execution.
NEAR-TERM WOES
In Rs croreQ1FY11% chgFY11EFY12E
Net sales1,1060.26,7508,100
OPM (%)9.210 bps9.59.6
Net profit 28-21.0270338
EPS (Rs) - - 10.011.8
PE (x) - - 15.813.4
E: Estimates; change is year-on-year; consolidated numbers

While the June quarter was marked with execution delays, for the rest of the year the company expects execution to improve and has maintained its revenue guidance of Rs 6,700-7,100 crore, which is higher by 22-29 per cent, compared to 2009-10. This means the company will have to grow its revenues at about 30 per cent over the next three quarters , which analysts believe could be a bit difficult and needs to be watched.

Investment rationale
While near-term concerns remain, a strong order book and better industry outlook, along with company’s positioning in the industry, should reward investors in the long run. Even if the company ends up with a shortfall on the execution front this year, expect growth to be higher in 2011-12. Also, its 80.5 per cent subsidiary IVRCL Assets & Holding is targeting a turnover of Rs 1,000 crore in 2010-11, which is significantly higher than Rs 143 crore in 2009-10 and should drive IVRCL Infra’s consolidated performance in the current year. The growth will be led by the start of the commercial operation of two build, operate, transfer (BOT) road projects and a water desalination project in Chennai.

Meanwhile, as a result of the near-term execution concerns that have led to the stock’s decline recently, valuations have turned attractive. After excluding the value of its listed subsidiaries IVRCL Assets (Rs 40 a share) and Hindustan Dorr Oliver (Rs 16 a share), the stock (at Rs 160) is trading at 8.5 times its standalone 2011-12 estimated earnings. Given that analysts value the stock at Rs 190, there is potential for upside.

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