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. IVRCLâ€™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

Written by ITW Editor · Filed Under Uncategorized

Concrete gains

February 18, 2008

Mega investments in infrastructure and the recent market correction offers an exciting investment opportunity in construction stocks.

The robust GDP growth rate experienced by the country in the last few years is indeed commendable and was aided by investment in infrastructure. To sustain growth rates, it is imperative for India to make higher investments towards setting up world-class infrastructure. As per the planning commission estimates, investments in infrastructure is set to go up by a whopping 130 per cent to $520 billion for the eleventh Five Year Plan (FY 2008-12) as against the $226 billion made during the tenth plan (FY 2003-2007).

Construction companies will be among the first beneficiaries of these investments and will deliver good and sustainable long-term growth.

Since the investment plans for each of the sub-segments in infrastructure space varies, based on priorities, there is reason to believe that not all the segments or companies will grow at all times. For instance, regional players or less diversified ones may experience volatility in revenues. For companies, faster project execution capabilities and access to key construction machinery (equipment) are equally critical, which in turn will determine the growth rates and profitability margins, respectively for any company. For example some companies are looking at purchasing their own equipment to tackle rising hiring costs and protect margins.

Thankfully, despite issues, the huge opportunity dwarfs concerns. Says Satish Ramanathan, head equities, Sundaram BNP Paribas, “While the future is promising, earnings could be volatile. Choose companies on valuations, order book and services portfolio.”

Last, but not the least, the recent correction in stock markets provides an opportunity to buy good companies in the space at reasonable valuations. Among many stocks, we have picked 10 stocks—four large caps (Read: Bigger the better) and six mid-caps, which are likely to emerge as key beneficiaries of the ongoing investments in the infrastructure sector. Bigger companies are well-established, diversified and less risky. Investors with low risk appetite can consider them. The smaller ones are efficiently managed and are on the growth path with good earnings visibility. Notably, they may also grow faster, given the size of the opportunity and their individual strengths. But, small size also means that there is an element of risk and hence, investors need to review them on a quarterly basis and look at the flow of new business and financial performance.

ON THE HIGHWAY

Era Infra Engineering

Era Infra Engineering, which was earlier into the construction of industrial and commercial space, has diversified into verticals such as railways, roads and highways, airport, urban infrastructure and oil and gas. The company now commands a sizeable order book of Rs 4,100 crore, which is thrice its FY08 estimated revenue.

The company is also developing commercial and residential buildings on its 500 acre land in and around Delhi and Jaipur. Though some of these projects will only be completed by FY10 and FY11, four of them will be completed in FY09 thus providing significant revenue growth.

Besides, the company is also investing about Rs 200 crore in growing the building structure segment. Building structures, which includes the construction of metal structures used at public and private places, is a high growth and high margin business accounting for 21-22 per cent operating margins. The company is currently having total capacity of 45,000 tonne per year of structure, which will be expanded to 185,000 tonne per annum by September 2008. The contribution from new capacity will reflect partially in FY09 and fully by FY10. The expanded capacity at current realisation of Rs 58,000 per tonne can get additional revenue of Rs 750-850 crore per year, assuming 70-80 per cent capacity utilisation.

Additionally, the company is also investing in plant and equipment to scale up its in-house capabilities; currently, 75 per cent of its equipment requirement is met in-house (gross assets at Rs 500 crore). The company will further spend about Rs 200-250 crore over the next year towards purchase of equipment. This will help cut costs and generate additional revenues by way of renting out to third parties.

That apart, Era also plans to increase its Ready Mix Concrete (RMC) capacity 10-fold by installing about 50 new RMC plants over the next 2-3 years, at an estimated cost of Rs 350-400 crore. About 90 per cent of the new RMC production will be sold to third parties. Expect this business to contribute a large chunk to revenues.

Given its in-house equipment and RMC facilities, Era enjoys healthy operating margins of about 20 per cent and RoNW (return on net-worth) of 30 per cent, among the best in the industry. The company’s core business is growing at robust pace, which along with the strong order book and investments will drive growth.

RISING HIGH

Sadbhav Engineering

Sadbhav Engineering, with a focus on the road segment, would be a key beneficiary of the ongoing investments in this segment. Of the company’s current order book of Rs 2,300 crore, road projects account for over 70 per cent, including 32 per cent from BOT projects. Enhanced focus on BOT projects has seen the company win four BOT road projects in consortium with other players over the last six months; Sadhbav’s equity contribution is pegged at Rs 92 crore. Going forward, the BOT projects are expected to contribute significantly to revenues as the company has achieved financial closure of Aurangabad-Jalna and Nagpur-Shinoi project during Q3FY08. It expects the Mumbai-Nasik expressway project to achieve closure by December 2008.

From Q4FY08 onwards, its projects in the relatively higher margin mining segment (9 per cent net margin) would be a positive trigger, and will help in improving its bottom line. The revenue will accrue from its ongoing project with GHCL and the recent Rs 245.24 crore order from the Northern Coalfields. Sadbhav Engineering currently has 15 per cent of its current order book from mining. However, the mix is expected to go up as domestic companies are allotted more mines and thus, reflects huge potential for excavation work.

Considering its current order book, which is over three times its FY08 estimated revenue, the company is expected to maintain revenue growth of over 50 per cent for the next two years. Also, with the increasing share of mining and the captive resources, the operating margins are expected to improve from 11.9 per cent in the FY07 to 12.5 per cent in FY08 and 13 per cent in FY09. The expansion in margins will also lead to the higher earnings growth. While these positives are partly reflecting in the higher valuations, the stock has good potential.

Pratibha Industries

Pratibha Industries is emerging from being a small player handling projects with an average size of Rs 10-20 crore to a bigger player. The most recent order bagged by the company is as big as Rs 300 crore. The company, which was primarily into the water projects (about 70 per cent), has diversified into other construction segments such as industrial projects, roads, urban infrastructure, airports, railways, pipeline and tunneling. The company has a strong focus and expertise in handling water-related projects, accounting for 60 per cent of its total order book.

Further, to grab the growing opportunities in the water segment, micro tunneling and piping projects, the company has formed a JV with Ostu Stettin of Austria, the world’s third largest tunneling company. It will help getting complex projects involving tunneling for laying pipes in high density urban areas for underground tunneling.

Besides, the company is also integrating backwards into manufacturing of SAW spiral pipes, with a capacity of 90,000 tonnes per annum. These pipes will be used for captive consumption as well as commercial sales to other companies for use in water transmission, oil and gas, sewerage and other industrial usage.

Within construction, the company has also diversified into some of the high potential segments, having undertaken (either independently or jointly) construction of complexes, buildings, airports and roads.

A strong order book of almost 4.5 times its FY08 estimated revenue and better outlook for urban infrastructure and water-related projects, indicates a robust future for the company. Besides, growth would be driven by the increasing revenue share of pipe manufacturing business in FY09. According to estimates, the SAW pipe segment alone can add about Rs 240 crore of revenue in FY09 at 60 per cent capacity. Overall, the stock is attractive from a long-term perspective.

Ahluwalia Contracts

Ahluwalia Contracts, primarily into construction of residential and commercial projects, is now diversifying into the urban infrastructure space. Although urban infrastructure still contributes just 3 per cent of its revenues, the company plans to increase its share to 20-25 per cent over the next three years.

On these lines, the company will bid for select BOT projects, especially multi-level car parking and bus terminus. The company has already been awarded a BOT project in Rajasthan for constructing a bus terminus, which also includes a commercial complex, wherein the targeted IRR (internal rate of return) is a sound 20 per cent. There is huge opportunity in the multi-level car parking segment, as over 30 projects are likely to be awarded in Delhi alone.

The company being an established player in the National Capital Region (NCR) is expected to gain from the residential and commercial projects consequent to the 2010 Commonwealth Games, to be held in Delhi and also the all round infrastructural development in the NCR region. It has already won some of these projects, including the recently bagged Rs 688 crore Commonwealth Games 2010 village residential project.

Considering its growth plans and projects in hand, the company is incurring a capital expenditure of around Rs 55 crore in FY08 and Rs 110 crore in FY09. This will also include the expansion of its RMC capacity from 210 cubic meter per hour currently to 300 cubic meter per hour in FY09. The RMC division, which contributed over 18 per cent to revenues in FY07 (Rs 81.40 crore), should see its revenues grow at a healthy pace over the next two years.

The healthy order book (3.24 times of FY08 estimated revenues) provides earnings visibility over next two years. Over the long-term, growth will be aided by the company’s diversification.

Tantia Construction

North East and eastern India are considered to be underdeveloped. Investments are required towards construction of roads, ports, power and other infrastructure facilities. The Centre has already indicated that it intends to spend Rs 50,000 crore towards construction of roads and another Rs 2,000 crore for rail connectivity in the North-East over the next five years.

Tantia, which generates about 96 per cent of its revenue from the eastern and north eastern region by undertaking roads and railway projects, will be the key beneficiary.

To further capitalise on this, the company is foraying into other segments of infrastructure and BOT projects. Its relatively smaller size and limited presence is reflecting in the lower valuation it enjoys vis-à-vis its peers, which should hopefully correct as the market gains confidence in the company. What is currently playing in its favour are opportunities and relatively less competition in the North East.

Considering the industry outlook and healthy order book to be executed over the next 30 months, the company may maintain revenue growth of over 50 per cent in the next two years.

Gayatri Projects

In a recent development, Gayatri Projects signed an MoU with DLF to jointly undertake construction of road projects on BOT basis. The new entity will leverage the capabilities of the two companies and, is expected to develop projects worth over Rs 1,000 crore every year. The tie-up with DLF is also expected to provide Gayatri Projects an entry into the real estate business; it would be developing properties along with DLF. Gayatri Projects is a focused player in the construction of roads and irrigation segment, which account for about 98 per cent of its order book. The company is now venturing into urban infrastructure and the water treatment segments, which will not only help diversify revenue streams but also improve margins; these are already high at over 15 per cent compared with the industry average. That’s because, the company owns nearly 100 per cent of the project related equipments.

Apart from constructing infrastructure, like other companies, the company is looking at capitalising on the growing opportunities in the BOT segment. It currently has five BOT road projects, which have already achieved financial closure. Of this, revenue from three projects is expected to start flowing from March 2010. Analysts value the BOT projects at Rs 120-170 per share, based on the discounted cash flow method. The BOT projects will provide a sustainable or steady cash flow in the long run and help in improving its profitability on the back of higher margins.

Given the high opportunities in the infrastructure sector and diversification into other geographies and segments, the cash contract (non-BOT) business will continue to grow at a robust rate, over the longer term. For the next two years though, earnings will grow on a sustainable basis, backed by the strong order book of Rs 3,400 crore (almost 4.5 times its FY08 estimated revenue) executable over the next 30 months. At current price levels, the stock is trading at a relatively lower valuation, compared with its peers and, is capable of delivering good returns.

Bigger the better

Bigger companies score heavily on size, services portfolio, strong execution capabilities and have a proven track record, all of which provide great comfort and hence justify premium valuations.

IVRCL Infrastructures & Projects

The increasing allocation towards water-related projects augurs well for IVRCL, which generates 57 per cent of its revenue from it. Besides, IVRCL is also present in other growing segments such as roads, building & structures and power. Its order book of Rs 11,000 crore provides strong revenue visibility. Analyst value the company at Rs 550-650 per share on a sum-of-parts valuation of its different businesses and investments in subsidiaries like Hindustan Dorr Oliver and IVR Prime.

Hindustan Construction Company

A dominant player in transport segment, Hindustan Construction is now focusing more on profitable segments such as water and power. Of its order book of Rs 9,050 crore, power projects accounts for 44 per cent and water projects 22 per cent. This diversification will not only help it grow faster but also improve margins. Long-term growth will be aided by improving revenue mix, strong order book and its real estate business (12,500 acre Lavasa project, valued at Rs 60-100 per share. On a sum-of-parts basis, analysts value its share between Rs 210-260.

Nagarjuna Construction

Nagarjuna Construction has been growing at 58 per cent annually over the last four years and is expected to grow at about 40-45 per cent during FY08-10. The growth will be driven by robust order book coupled with expansion of volumes and margins, led by diversification into segments like metal, oil & gas and real estate development. Nagarjuna is investing in BOT projects; has five road projects, two hydro power and two sea port projects. Its businesses are valued at Rs 315-395 per share.

Punj Lloyd

After acquiring Singapore-based Sembawang in FY07, Punj Lloyd tapped the growing global energy market with extended services portfolio. In the domestic market, it has forayed into onshore drilling, real estate and ship building business with 25.1 per cent stake in Pipavav Shipyard. Its consolidated order book of Rs 18,500 crore, provides reasonable comfort. Going forward, net profit is expected to grow faster on the back of turnaround of Sembawang; consolidated operating margins are expected to improve to 10 per cent by FY09 (8 per cent in FY07).

Source: Jitendra Kumar Gupta : business-standard.com

Written by ITW Editor · Filed Under Investment and Finance, Media

Infrastructure companies — Stack up with discretion

October 14, 2006

Driven by infrastructure spending, the demand side for construction companies remains robust. The key to success will lie in their ability to ramp up resources and capitalise on order flow.

Compound Annual Growth over 3 Years (%)
Indicative OPM across segments (%)

Click on the image to enlarge

Infrastructure has been the new market mantra the past two years. While private equity investors showed keen interest in infrastructure/construction companies, a number of mutual funds also jumped on to this booming bandwagon, investing a chunk of their assets in the sector. An annualised revenue growth of 30-40 per cent over the past three years and an average order size of three-four times the revenues also seem to justify this newfound enthusiasm.

Written by ITW Editor · Filed Under Uncategorized