KJMC downgrades IVRCL to `Hold`

February 20, 2012


KJMC Institutional Research has downgraded IVRCL to `Hold` with a pricetarget of Rs 63 as against the currentmarket price (CMP) of Rs 60 in its report dated Feb. 16, 2012. The broking house gave the following rationale:

IVRCL Q3FY12 standalone result was below our expectation on low execution. The revenue for Q3FY12 fell by 15.2% yoy, worst in past 5 quarters. Execution took a hit on various hurdles like state elections, legal &environmental issues, slower decisions, etc related to the contracts under executions. EBITDA margin took a hit with 194 bps yoy decline at 7.3% on a lower revenue base. The PAT for the quarter declined by 83.9% yoy to Rs 67.9 million. IVRCL has an order backlog of Rs 250 billion (including Rs 30 billion of L1 order) at the end ofthe quarter.

Key Highlights

Execution remained subdued in Q3FY12:

The execution continued to remain subdued in Q3FY12 with net revenue declined sharply by 15.2% on yoy basis to Rs 11.9 billion. Execution took a hit on various hurdles like state elections, legal & environmental issues, slower decisions, etc related to the contracts under executions. We believe that the execution may remain weak in next few quarters also. But looking at the strong order book and a low revenue base in FY12E, we expect strong revenue growth in FY13E.

Order book grew to Rs 250 billion:

IVRCL has reported a robust Rs 250 bn of order backlog at the end of the quarter which also includes Rs 30 billion of L1 orders. The order inflow for Q3FY12 was Rs 30 billion and for 9MFY12 was at Rs 107 billion. The order inflows in the quarterincludes Rs 12 billion of EPC work for the new BOT road project Raipur-Bilaspur bagged by IVRCL Assets. The orderbook composition included 37% from water & irrigation, 29% from transportation, 22% building, 7% power T&D and 5% from oil & gas. The company is positive on the future outlook in terms of new inflows as the current bids outstanding are to the tune of over Rs 500 billion. It has witnessed a bid strike rate of 20-22% in the past few years, and going by the track record there is strong visibility of new orders.

Update BOT Business:

IVRCL will be selling one of its road assets however the company has not disclosed the name of the project. It has also sold its land parcel in Noida. The company expects Rs 4 bn of proceeds from the sale of land and BOT assets. The proceeds would be utilized to meet equity requirement in BOT projects. In FY13 it would need Rs 3 billion of equity commitment in the BOT projects. The process of merging BOT subsidiary, IVRCL Assets is on track. It has received court order and shareholders approval is expected in this month. IVRCL’s board had earlier approved the merger. As per the swap ratio the shareholders of IVRCL Assets will receive 5 fully paid up equity shares of Rs 2 each in IVRCL for every 6 shares of Rs.10 each held in IVRCL. The merger would result in the issuance of additional 39.8 million shares of IVRCL (15% dilution), hence the equity capital of IVRCL would increase from 267 million shares to 306.88 million.

Outlook & Valuation:

We have downgraded our revenue and earning estimates for FY12E factoring in impact of lower execution. Based on FY12E and FY13E revised EPS of Rs 2.1 and Rs 4.8, the stock is currently trading at a P/E of 38.4x and 12.6x respectively. Considering, the slower execution and recent share price appreciation, we downgrade our rating on the stock to Hold with target price of Rs 63 based on SOTP valuation.

Source: http://www.myiris.com

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