Analysts hopeful of IVRCL's recovery in next 2 yrs

Rs 27,000 cr order book, which is 5.4 times its FY12 revenue

Even after the Essel Group sold its entire stake in infrastructure company, IVRCL, investor interest remains good. Funds like Merrill Lynch and Societe Generale have recently bought 4.22 million shares of IVRCL at Rs 46-47 apiece. Though the stock has fallen since then to Rs 41 levels, valuations look better given current market capitalisation of Rs 1,270 crore and IVRCL's debt of Rs 5,700 crore. However, lower valuations reflect the concerns over its poor financial performance, which has been impacted due to slow project execution, falling margins and higher interest cost. Some of these issues may not ease in the near term, but analysts are hopeful that IVRCL should see some revival by 2013-14.

So, what is making analysts hopeful? Among the few things, IVRCL has a huge order book of Rs 27,000 crore, which is 5.4 times its FY12 revenue. Though part of the order book (about Rs 3,000 crore) is considered to be slow moving, even excluding this, the company is looking to convert 25-30 per cent of it into revenues in 2012-13. This could mean revenue of Rs 6,000-7,000 crore, which is better than the adjusted revenue of Rs 4,971 crore in 2011-12.

Importantly, analysts are also expecting margins to improve by 100 basis points led by better execution and lower costs and stabilise around eight-nine per cent over the next two years. However, part of these savings from operating efficiencies will be offset by higher interest cost. This is also a reason that though net profits will be higher at Rs 50-55 crore compared to a loss of Rs 124 crore in FY12 (15 months ended June 2012), net profit margins will remain below one per cent. The key to improve net margins is to bring down interest cost (annualised outgo of Rs 585 crore in FY12).

“The fortune of IVRCL is linked with the interest rate cycle. Even if we could see a 100 basis point improvement in the rates, IVRCL, which has high earnings sensitivity will do significantly better both in terms of savings in the form of interest cost as well as achieving high turnover as the working capital improves. It already has strong order book and if the cycle improves higher execution will reflect in earnings,” says Amit Srivastava, analyst at Nirmal Bang Institutional Equities. He adds that the company is taking all the right steps to strengthen its balance sheet, which could reward in the case of upturn in the capex cycle in the coming months.

The recent rate cut by RBI and further easing should also bring some relief. However, the larger gains could come from lowering of debt and efficient management of its fund requirements.

Analysts believe that the company needed about Rs 1,600 crore to infuse in various projects as a part of equity contribution for the new build-operate-transfer projects. To deal with debt, the management is looking to issue convertible debentures and raising funds through stake sale in some SPVs besides monetisation of unrelated assets, which should partly address concerns.