IVRCL: Value in restructuring

IVRCL has announced a restructuring of its subsidiaries recently. The scheme proposes an amalgamation of IVR strategic resources and IVR Water Infrastructure, which are both wholly owned subsidiaries of IVRCL with IVR Prime urban developers, its real estate arm, where it has a 62.35% stake.

Under the scheme of arrangement, IVRCL will receive 59.5 million shares of IVR prime and its stake subsequently will go up to 80.46%. Its equity base will double to 123.6 million shares.

Operationally, it brings all BOT (build, operate and transfer) assets under one company, IVR Prime. This includes a portfolio of three road projects. One is already operational and two should be ready by January 2010, according to a Motilal Oswal report. A desalination plant in Chennai where it has 75% ownership is the other project due to be completed in FY10.

Projects in the pipeline include two road projects in Maharashtra where it has 51% and 75% share and a Rs 3000 crore crude tankage project of 12 fuel farms in consortium with IOC Tankages at Paradip, where IVRCL’s stake is 38%. The letters of intent are due for these projects.

Creating value

The company has invested about Rs 450 crore and given advances of Rs 120 crore towards cost overrun. Commissioning delays of about 8-10 months haave increased costs and interest expenses. The deal values the projects at a fair value of Rs 900 crore, at a share price of Rs 152/ share for IVR prime (market price on date of announcement) translating to a  valuation of 2x P/BV of the BOT portfolio being transferred. This is seen as higher than analyst estimates as per a Citigroup report.

The restructuring announced recently is seen as a positive as it reducing funding requirements at a standalone level. It will boost IVR Prime’s net worth (almost double it to over Rs 2000 crore, assuming a transaction value of about 3x P/BV, according to Motilal Oswal) and this can be leveraged to meet the higher pre-qualification requirements for larger projects.

Its future funding requirements include Rs 430 crore as equity for projects over a period of three years, Rs 300 crore of IVRCL loan repayment and Rs 370 crore outstanding payments for 101 acres of land acquired in Noida, lists a Religaire report.

IVR Prime Urban is a largely debt free company and debt as at end FY09 was Rs2.8b in advances from IVRCL. The debt-raising and refinancing capabilities for IVR Prime Urban will be about Rs 500 crore post transaction. With IVRCL’s stake at over 80%, IVR Prime can also comfortably access capital markets to raise additional equity.

Other positives

For IVRCL the merger means it can concentrate on construction projects and avoid diluting equity or raising debt to fund BOT and real estate projects. It also will have the first right of refusal for construction component of the BOT project, as per Citi.

The results for IVRCL were disappointing this quarter because of slower than expected revenue growth (7.6% y-o-y for Q2FY10 and 11% y-o-y for H1FY10 against a management guidance of 30-35% for the full year) because of slower project execution in Andhra Pradesh because of elections. Margins, however, expanded by 140 bps y-o-y.

IVRCL currently trades at a P/E valuation of 22.84x FY10 and about 18x FY11 consensus analyst EPS estimates and at 2.9x P/B ratio based on consensus book value per share estimates. It closed at Rs 407.40 on 13 November, 09, up 2.63% in the day.