IVRCL faces multiple headwinds for a few more quarters

Infrastructure major IVRCL Ltd may be staring at a gloomy future with rising interest costs, growing need of funds for equity investment in special purpose vehicles, issues dragging the execution of projects and drop in margins despite flat sales.

Analysts in their reports have remained consistent in estimating that the company’s future at least for the near term remains challenging.

For the first quarter ended June 2011, IVRCL recorded Rs1,121.90 crore in revenue, which is almost similar to the revenues recorded in the first quarter of the previous year.

Its profit for the Q1 of the current fiscal was Rs4.21 crore as against Rs28.07 crore in the corresponding period of the previous year.

The lacklustre performance for the quarter was attributed to the delays in executing the works by the company’s sub-contractors due to their funding constraints and also the rise in raw material costs.

The pricing mechanism adopted by the company for executing the projects, too, is said to be a drag on the margins. The company’s Ebitda margins have dropped to about 7.4% from 9.1% in Q1 of the last fiscal.

Inderjeetsingh Bhatia and Abhishek Bhandari of Macquarie Equities Research in their report on August 16 said, “IVRCL needs to start delivering revenue growth and repair its balance sheet to deliver meaningful growth in earnings. We think the tough conditions are likely to persist for a few more quarters.”

According to them, the working capital cycle remains stressed due to loans and advances extended to IVRCL Assets and an increase in advances to suppliers and sub-contractors.

“High interest rates imply 60% of Ebitda is being eaten up by interest, leaving little for shareholders,” the report said.
The company has also been hit by the rising interest costs.

The current average cost of debt has been pegged at 13%. The rise in interest rates has also resulted in a significant jump in the interest costs from `45.3 crore to `62.8 crore.

“Interest expense increased 39% year on year due to interest costs, rising from average 9-9.5% in fiscal 2011 to 12.5-13% at present. Working capital cycle (net of cash) deteriorated to 146 days on account of sharp reduction in creditors to Rs2,330 crore (from `2,700 crore as on March 2011).

The management indicated that earlier it used to procure supplies at credit for 30-45 days. However, due to high interest rates, it is now being required to provide advances to its suppliers in some projects,” Amish Shah and Abhishek Bansal of Credit Suisse said in their report on August 16.

“We cut our FY12-13 earnings estimates by 42% on delays in execution, deteriorating working capital cycle and rising interest costs,” the analysts said.

Similarly, the need to infuse fresh capital into the SPVs floated to execute various projects, too, remains a matter of concern.

Currently, the BOT projects are being handled by IVRCL Assets.
According to estimates by the analysts, the parent company needs to pool in about `750 crore over the next two to three years towards equity infusion and in the current year the requirement has been pegged at `180 crore.

The company has been working on a plan to put a part of its real estate on the block to raise funds to meet the equity requirements. However, the Macquarie report titled “Bad times expected” said, “IVRCL’s expectation of selling mature assets and real estate may not come to fruition with the current tough market conditions.” 

However, Rupa Shah of Prabhudas Lilladhar in a report titled “Troubles galore” said, “Fund infusion in BOTs and land sales could be some of the triggers, going forward. We have further downgraded the FY12 and FY13 estimates by factoring in the present slowdown.”