Across-the-board infra presence positive for IVRCL

The government has huge plans for infrastructure development in coming years. With the Indian economy looking to grow at more than 8%, the construction companies whose fortunes are directly related to economic development would grow faster. IVRCL Infrastructures & Projects, one of the leading infrastructure players in the country, would benefit from huge investments lined-up in the social and physical infrastructure development.

Business: IVRCL Infrastructure and Projects Ltd (IVRCL) is engaged in execution of engineering, procurement, construction (EPC) and lumpsum turnkey projects across various infrastructure segments.

The Hyderabad-based company is present across 21 states and a diversified business model with presence in the water and irrigation sector, along with expertise in roads and bridges, buildings and industrial structures, and power transmission & distribution. IVRCL undertakes projects like environmental sewage treatment, desalination, canal works, pumping and storage under water segment, which is its core business strength.

The company has healthy order backlog of Rs 22,000 crore as on January 31, which includes L1 tenders worth Rs 4,500 crore, where company is the lowest bidder. The water supply and environment projects segment contribute around 47% to the total order book, while building & industrial structures, transportation and power transmission segments contribute 23%, 23% and 7% to the backlog, respectively.

The company operates through dedicated verticals — IVR Water Infrastructures Ltd (IVRWIL) and IVR Strategic Resources & Services Ltd (IVRSRS) which take care of projects independently.
IVRCL has key subsidiaries like IVR Prime Urban Developers (IVR Prime) and Hindustan Dorr-Oliver, apart from several strategic joint ventures. IVR Prime is into real estate development covering housing, commercial and SEZ projects; while Hind Dorr-Oliver is engaged in providing engineering and turnkey solutions and EPC installations in liquid-solid separation applications across various industries.

Investment rationale: The government has ambitious plans related to physical and social infrastructure development. It has set a target of building 20 km of roads per day. It has also laid huge outlays for irrigation, with only 38% of net sown area currently irrigated, and the power sector, which faces huge demand-supply mismatch. These programmes would directly benefit companies like IVRCL over 5-7 years.

IVRCL’s presence across the high-growth infrastructure segments de-risks its business from slowdown in any particular segment.
The company has also reduced its exposure to Andhra Pradesh projects over the last few quarters from 40% levels to around 21% currently (considering L1 tenders) and has got substantial orders in Maharashtra, Orissa, Madya Pradesh and Tamil Nadu. The company has a direct exposure of Rs 1,150 crore in Andhra projects, while around Rs 3,000 crore of work is on sub-contractor basis. It has put on hold a majority of its state projects for some time on account of the Telangana issue and has suffered delays in getting payments close to Rs 150 crore.

IVRCL is pre-qualified in almost 12-14 projects to be offered by NHAI and has L1 status in many of these.

The management expects to maintain operating margin of 9.6-9.7% on account of better project mix concentrating on high margin EPC and BOOT projects.

The company is mulling over amalgamation of the two verticals IVRSRS and IVRWIL with IVR Prime.

This would lead to better debt-to-equity ratio in the restructured entity, along with stronger pre-qualification credentials to bid for larger projects. Also, most of its projects (around 95%) in the order backlog are covered by escalation clause.

Concerns: The political instability in Andhra Pradesh would weigh on its projects in the state, which have been kept on hold. IVRCL also faces risks related to slower execution and cost overruns which may impact revenues. Any slowdown in ordering activities or delay in payments would affect revenues. Severe interest rates hike may also impact earnings.

Valuations: Slower execution on account of floods and political turmoil in Andhra Pradesh and legal dispute in Madhya Pradesh projects led to disappointing Q3FY10 numbers and subsequent reduction in revenue guidance for fiscal 2010 by around 10%. However the robust order backlog provides good visibility for revenue growth in the coming years. Revenues are expected to grow at CAGR of 19% and net profit at CAGR of 13% over FY09-FY11E. At current market price of Rs 317.60, IVRCL trades at a PE of 18.92x and 14.87x its FY10E and FY11E earnings, respectively. In view of its presence into diversified infrastructure segments, strong order backlog and experienced management team with excellent execution record, the stock can be considered from a long-term perspective.

Disclaimer: The writer does not hold any share in the company