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India Equity Research
Construction
November 18, 2011
HOLD IVRCL
Target Price (INR) 36 Execution slips, merger may act as overhang
Rating Revenue was down 3% y‐o‐y for the Sep11 quarter – continuing the
downtrend in growth seen in the past two quarters. Interest/revenue
Last Price (INR) 36.3 stood at 6.2%, leading to PAT margins of just 0.8%. A couple of large
Bloomberg code IVRC IN
Reuters code IVRC.BO
orders led to a large uptick in order inflows, which are unlikely to be
Avg. Vol. (3m)(mn) 6.44 sustained. Borrowings are up 26% since Mar11. We cut our FY12f‐
Avg. Val.(3m)(INRmn) 251 FY14f EPS by up to 54%, factoring in weaker execution and higher
52‐wk H/L (INR) 140 / 31.5 borrowing costs. A merger with its subsidiary may led to increase in
Sensex 16,462
MCAP (INRbn/USDmn) 9.68 / 190
balance sheet exposure to real estate and BOT assets. We roll over our
target to Sep12 and cut it to INR36 – based on the average of 5.0x P/E
Shareholding (%) 6/11 9/11 and 4.0x EV/EBITDA. We cut the rating to Hold. High gearing, a further
Promoters 9.5 11.0 increase in interest rates and a prolonged decline in the investment
MFs, FIs, Banks 4.0 3.6
FIIs 48.3 39.5
rate are the key risks.
Public 16.1 21.0
Others 22.0 24.9 Large shrinkage in PAT margin as interest/revenue climbs to 6%
Execution problems continued as revenue declined by 3% y‐o‐y in the Sep11
Stock Chart (Relative to Sensex) quarter. The revenue growth trajectory continued to head south for a third
200 consecutive quarter. EBITDA margins recovered sequentially to their normal
range, while interest costs continued to climb and stood at 6.2% of revenue for
150 the quarter – the highest in at least the past eight years. PAT margins stood at
0.8%, after a lower tax rate. Borrowings have increased by 26% since Mar11,
100 mainly on account of INR3bn of incremental loans and advances to subsidiaries
and lower liabilities as the credit period declined on account of vendors facing
50 working capital problems.
Cut EPS forecast by up to 54%; real estate business risk continues
0 The board has approved a merger ratio of 5 shares of IVRC for 6 shares of IVRCL
Nov10 Mar11 Jul11 Nov11
Assets and Holdings (IVR IN, NR) ‐ the merger effective from 1 April, 2011.
IVRCL Infrastruc Sensex Rebased
While the real estate assets will continue to remain under a separate entity, a
100 acre land parcel in Noida (net INR3.2bn investment) would come under
Stock Perfm. (%) 1m 3m 1yr IVRCL post merger. The merger may ease the funding for the real estate
Absolute ‐1.8 ‐5.6 ‐72.7 business. While the management expects the merger to be earnings neutral for
Rel. to Sensex 1.5 ‐3.3 ‐55.6
IVRC on standalone basis, any future needs for balance sheet support to the
Financials (INRmn) 03/11 03/12f 03/13f real estate business would increase the risks to construction business earnings
Sales 56,515 54,024 57,490 IVRC expects to sell the Noida land and reduce debt by a significant amount by
YoY (%) 3 ‐4 6 Mar12. As at Sep11, IVRC has given total loans and advances of INR8.3bn to
EBITDA (%) 9.1 9.1 9.2 IVRC (up by INR3bn since Mar11). We cut our FY12‐FY14 EPS forecast by up to
A.PAT 1,580 900 957
54%, assuming slower execution and higher borrowing costs.
Sh o/s (diluted) 267 267 267
A.EPS (INR) 5.9 3.4 3.6
Cut to Hold with Sep12 TP of INR36; based on 5x P/E and 4x EV/EBITDA
YoY (%) ‐24 ‐43 6 We roll over our target to Sep12 and based on the average of the fair values
D/E (x) 0.7 0.8 0.9 derived using a target P/E of 5.0x and EV/EBITDA of 4.0x we arrive at our TP of
P/E (x) 6.1 10.8 10.1 INR36 (92 earlier). With a 1% downside to our target, we cut the rating on the
EV/E (x) 4.6 5.4 5.3 stock to Hold. High gearing, a further increase in interest rates, a prolonged
RoCE (%) 8 7 6 decline in the investment rate, sharp increase in commodity prices and an
RoE (%) 8 4 5
increase in competitive pressures are the key risks. Pending final contours of
Quarterly Trends 12/10 03/11 06/11 09/11 the merger and its impact on earnings may act as an overhang for the stock
Sales (INRmn) 14,168 20,522 11,243 10,461 valuations.
PAT (INRmn) 423 1,033 42 81
Devang Patel, +91 022 66842861
devang.patel@avendus.com
Please refer to the disclaimer towards the end of the document.
India Equity Research IVRCL
Exhibit 1: Earnings revision summary
(INRmn) ‐‐‐‐‐‐‐‐‐‐ FY12f ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ FY13f ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐ FY14f ‐‐‐‐‐‐‐‐‐‐
Old New Change (%) Old New Change (%) Old New Change (%)
Revenue 61,045 54,024 ‐12 67,848 57,490 ‐15 77,680 61,640 ‐21
EBITDA 5,981 4,919 ‐18 6,681 5,263 ‐21 7,688 5,674 ‐26
EBITDA margin (%) 9.8 9.1 ‐69bp 9.8 9.2 ‐69bp 9.9 9.2 ‐69bp
PAT 1,883 900 ‐52 2,094 957 ‐54 2,480 1,189 ‐52
EPS (INR) 7.1 3.4 ‐52 7.8 3.6 ‐54 9.3 4.5 ‐52
Order inflow 63,856 93,086 46 70,242 62,368 ‐11 80,778 65,486 ‐19
Source: Avendus Research
Exhibit 2: Sum‐of‐the‐parts target price computation
Particulars Method INR/share % of Total
EPC value on P/E method 5.0x P/E 20
EPC value on EV/E method 4.0x EV/E 11
Average EPC value (A) 16 44
55% stake in HDOR CMP27 4 11
76% stake in IVR CMP28 16 44
Total value of Investments (B) 20 56
SOTP TP (A+B) 36 100
Source: Avendus Research
Despite a healthy order Exhibit 3: Revenue (INRmn) and growth Exhibit 4: Margin trend (%)
book, revenue growth has
been slipping over the Revenue Y‐o‐Y growth (%, RHS) EBITDA margin Interest/revenue
PAT margin
past two quarters –
24,000 30 12
implying execution
problems. EBITDA margins
have been impacted by
16,000 15 8
lower revenue and PAT
margins – on account of a
sharp increase in interest
8,000 0 4
costs over the past two
quarters.
‐ ‐15 ‐
Sep09 Mar10 Sep10 Mar11 Sep11 Sep09 Mar10 Sep10 Mar11 Sep11
Source: Company, Avendus Research Source: Company, Avendus Research
Reported order backlog Exhibit 5: Order booking trend (INRmn) Exhibit 6: Order backlog trend (INRbn)
includes L1 orders, based Order inflow BTB (x, RHS) Order backlog Y‐o‐Y (%, RHS)
which order inflows are 80,000 4.6 260 70
computed. Large order
book accretion reported in
the Sep11 quarter on the 60,000 4.3 240 50
back of large NHAI and
mining orders. 40,000 4.0 220 30
20,000 3.7 200 10
‐ 3.4 180 ‐10
Sep09 Mar10 Sep10 Mar11 Sep11 Sep09 Mar10 Sep10 Mar11 Sep11
Source: Company, Avendus Research Source: Company, Avendus Research
Construction 2
India Equity Research IVRCL
VRC’s target P/E is
I Exhibit 7: One‐year forward P/E and target P/E (x)
reduced from 7x to 5x,
assuming a re‐rating may 1‐year forward P/E Average P/E Target P/E
wait till earning pressures 24
subside. The target P/E is
in line with an average 20
ROE of 5% over FY12f‐
FY13f. 16
Average = 13x
12
8
Target =5.0x
4
‐
Oct08 Jul09 May10 Feb11 Dec11 Sep12
Source: Company, Bloomberg, Avendus Research
Exhibit 8: One‐year forward EV/EBITDA and target EV/EBITDA (x)
EV/EBITDA (x) Average Target EV/EBITDA (x)
11
8
Average = 6.2x
5
Target = 4.0x
2
Oct08 Jul09 May10 Feb11 Dec11 Sep12
Source: Company, Bloomberg, Avendus Research
Exhibit 9: Relative premium to Sensex and LT’s P/E
Currently, IVRC is trading
at a 68% discount to LT’s Premium to Sensex P/E (%) Premium to LT P/E (%)
80
P/E, while on average it
has traded at a 62%
discount over the past 40
year and at a 41%
discount over the past
‐
three years.
‐40
‐80
‐120
Oct08 May09 Dec09 Aug10 Mar11 Nov11
Source: Company, Bloomberg, Avendus Research
Construction 3
India Equity Research IVRCL
Exhibit 10: One‐year forward EV/Sales and EV/Invested Capital
EV/Sales (x) EV/Invested Capital (x)
2.0
1.6
1.2
0.8
0.4
‐
Oct08 May09 Dec09 Aug10 Mar11 Nov11
Source: Company, Bloomberg, Avendus Research
Exhibit 11: Segment‐wise performance of IVR (standalone)
(INRmn) FY10 FY11 1HFY12
Segment revenue
Real estate 285 56 1,286
Infrastructure and others 1,153 6,778 2,576
Total revenue 1,438 6,834 3,863
Segment EBIT
Real estate 127 ‐8 ‐673
Infrastructure and others 55 492 266
Unallocated ‐87 ‐113 ‐63
EBIT 94 371 ‐470
Segment margins (%)
Real estate 44.5 ‐13.6 ‐52.3
Infrastructure and others 4.8 7.3 10.3
Total EBIT 6.6 5.4 ‐12.2
Source: Company, Avendus Research Note: 1HFY12 margins impacted by loss on sale of land
Risk factors
High gearing is impacting working capital availability and execution under tightening credit markets.
High interest rates for a prolonged period of time.
Continuing delays in policy making are leading to a prolonged decline in the investment rate.
A sharp increase in commodity prices.
An increase in competitive pressures.
Construction 4
India Equity Research IVRCL
Exhibit 12: Results snapshot for the Sep11 quarter
(INRmn) Sep10 Jun11 q‐o‐q (%) Sep11 y‐o‐y (%)
Total operating income 10,750 11,243 ‐7 10,461 ‐3
Total operating expenses 9,797 10,387 ‐8 9,524 ‐3
EBITDA 953 856 10 938 ‐2
Other income 57 49 9 53 ‐6
Depreciation 184 228 10 250 36
EBIT 826 677 9 741 ‐10
Interest 480 628 4 652 36
Recurring PBT 345 49 82 89 ‐74
Net extra ordinary items 0 0 0
PBT (reported) 345 49 82 89 ‐74
Tax 112 7 11 7 ‐93
PAT (reported) 233 42 93 81 ‐65
EO/Prior period items 0 0 ‐
Net income (reported) 233 42 93 81 ‐65
Avendus net income 233 42 93 81 ‐65
Shares outstanding (mn) 267 267 267
Avendus EPS (INR) 0.9 0.2 93 0.3 ‐65
Order inflows 21,710 10,000 600 70,000 222
Order backlog 240,000 210,000 22 256,000 7
BTB ratio (x) 4.6 3.7 4.5
Ratios (%)
EBITDA margin 8.9 7.6 9.0
EBIT margin 7.7 6.0 7.1
Net profit margin 2.2 0.4 0.8
Other income/PBT 16.4 99.9 60.0
Effective Tax rate 32.6 13.6 8.3
Source: Company, Avendus Research
Construction 5
India Equity Research IVRCL
Exhibit 13: Balance sheet snapshot as on Sep11
(INRmn) Mar10 Sep10 Mar11 Sep11 y‐o‐y (%)
Equity 534 534 534 534
Reserves 17,999 18,505 19,340 19,458
Net worth 18,533 19,039 19,874 19,992 5
Borrowings 16,133 22,666 20,958 26,343 16
Deferred tax asset 125 110 86 54
Total Liabilities 34,791 41,816 40,918 46,389 11
Net fixed assets 6,017 6,655 7,178 7,161 8
Investments 6,138 6,138 6,347 6,348 3
Inventories 2,447 3,076 2,732 3,063 0
Debtors 19,464 19,809 19,298 17,762 ‐10
Cash 1,644 894 1,432 1,119 25
Other current assets 16,845 18,993 21,530 21,795 15
Loans and advances 6,606 9,252 9,532 13,217 43
Sub‐total 47,005 52,023 54,523 56,956 9
Liabilities 23,924 22,729 26,727 23,812 5
Provisions 445 271 403 264 ‐3
Sub‐total 24,369 23,001 27,130 24,076 5
Net Current Assets 22,635 29,023 27,393 32,881 13
Total assets 34,791 41,816 40,918 46,389 11
Working capital (on TTM days' sales outstanding)
Inventory 17 21 18 20 ‐7
Receivables 132 138 125 115 ‐16
Working capital 154 202 177 213 6
Working capital (ex‐cash) 120 195 133 160 ‐18
Source: Company, Avendus Research
Construction 6
India Equity Research IVRCL
Financials and valuations (standalone)
Income statement (INRmn) Cash flow statement (INRmn)
Fiscal year ending 03/11 03/12f 03/13f 03/14f Fiscal year ending 03/11 03/12f 03/13f 03/14f
Total operating income 56,515 54,024 57,490 61,640 Net profit 1,580 900 957 1,189
Total operating expenses 51,369 49,105 52,226 55,966 Depreciation 758 978 1,035 1,148
EBITDA 5,146 4,919 5,263 5,674 Deferred tax ‐38 ‐48 ‐52 ‐64
Other income 120 132 145 159 Working capital changes ‐2,432 ‐3,034 ‐1,044 ‐832
Depreciation 758 978 1,035 1,148 Less: Other income 120 132 145 159
EBIT 4,508 4,073 4,373 4,685 Cash flow from operations ‐252 ‐1,335 752 1,283
Interest 2,180 2,787 3,005 2,986 Capital expenditure ‐1,647 ‐1,080 ‐1,150 ‐1,233
Recurring PBT 2,327 1,286 1,368 1,699 Strategic investments ‐209 ‐1,000 ‐1,000 ‐1,000
Net extra ordinary items ‐
‐
‐
‐
Marketable investments ‐
0 ‐
‐
PBT (reported) 2,327 1,286 1,368 1,699 Change in other loans & adv. ‐2,538 ‐1,463 ‐1,000 ‐1,000
Total taxes 747 386 410 510 Goodwill paid
‐ ‐
‐
‐
PAT (reported) 1,580 900 957 1,189 Other income 120 132 145 159
(+) Share in assoc. earnings ‐
‐
‐
‐ Cash flow from investing ‐4,274 ‐3,412 ‐3,005 ‐3,074
Less: Minority interest ‐
‐
‐
‐ Equity raised 0 0 0 0
Prior period items ‐
‐
‐
‐ Change in borrowings 4,825 4,500 2,500 1,500
Net income (reported) 1,580 900 957 1,189 Dividends paid (incl. tax) ‐186 ‐93 ‐93 ‐124
Avendus net income 1,580 900 957 1,189 Others ‐324 0 0 0
Shares outstanding (mn) 267.0 267.0 267.0 267.0 Cash flow from financing 4,314 4,407 2,407 1,376
Avendus dil. shares (mn) 267.0 267.0 267.0 267.0 Net change in cash ‐212 ‐341 154 ‐415
Avendus EPS (INR) 5.9 3.4 3.6 4.5
Growth ratios (%) Key Ratios
Total operating income 2.9 ‐4.4 6.4 7.2 Fiscal year ending 03/11 03/12f 03/13f 03/14f
EBITDA ‐3.1 ‐4.4 7.0 7.8 Valuation ratios (x)
EBIT ‐8.5 ‐9.7 7.4 7.1 P/E (on Avendus EPS) 6.1 10.8 10.1 8.2
Recurring PBT ‐28.3 ‐44.7 6.4 24.2 P/E (on basic, reported EPS) 6.1 10.8 10.1 8.2
Avendus net income ‐23.5 ‐43.0 6.4 24.2 P/CEPS 4.1 5.2 4.9 4.1
Avendus EPS ‐23.5 ‐43.0 6.4 24.2 P/BV 0.5 0.5 0.4 0.4
Operating ratios (%) Dividend yield (%) 1.7 0.8 0.8 1.1
EBITDA margin 9.1 9.1 9.2 9.2 Market cap. / Sales 0.2 0.2 0.2 0.2
EBIT margin 8.0 7.5 7.6 7.6 EV/Sales 0.4 0.5 0.5 0.5
Net profit margin 2.8 1.7 1.7 1.9 EV/EBITDA 4.6 5.4 5.3 5.1
Other income/PBT 5.1 10.2 10.6 9.4 Net Cash / Market cap. 75.2 86.7 98.6 104.7
Effective Tax rate 32.1 30.0 30.0 30.0 Per share ratios (INR)
Avendus EPS 5.9 3.4 3.6 4.5
Balance sheet (INRmn) EPS (Basic, reported) 5.9 3.4 3.6 4.5
Fiscal year ending 03/11 03/12f 03/13f 03/14f Cash EPS 8.8 7.0 7.5 8.8
Equity capital 534 534 534 534 Book Value 74.4 77.5 80.7 84.7
Preference capital ‐
‐
‐
‐ Dividend per share 0.6 0.3 0.3 0.4
Reserves and surplus 19,340 20,147 21,011 22,076 Total assets / equity (x) 2.0 2.1 2.3 2.3
Net worth 19,874 20,681 21,545 22,610 Return ratios (%)
Minority interest ‐
‐
‐
‐ ROCE 8.1 6.5 6.4 6.5
Total debt 20,958 25,458 27,958 29,458 ROIC 8.5 6.8 6.6 6.6
Deferred tax liability 87 38 ‐13 ‐77 ROE 8.2 4.4 4.5 5.4
Total liabilities 40,918 46,177 49,490 51,991 ROA 4.2 2.1 2.0 2.3
Gross block 9,242 10,323 11,473 12,705 OCF/Sales ‐0.4 ‐2.5 1.3 2.1
less: Acc. depreciation 2,324 3,302 4,338 5,486 FCF/Sales ‐3.4 ‐4.5 ‐0.7 0.1
Net block 6,918 7,020 7,135 7,219 Turnover ratios (x)
CWIP 260 260 260 260 Asset turnover (x) 1.5 1.2 1.2 1.2
Goodwill ‐
‐
‐
‐ Gross asset turnover 6.1 5.2 5.0 4.9
Investments 6,347 7,347 8,347 9,347 Inventory / Sales (days) 16.7 18.9 18.6 17.8
Cash 1,432 1,091 1,245 830 Receivables (days) 125.1 130.6 125.3 121.7
Inventories 2,732 2,873 2,981 3,036 Payables (days) 195.5 208.4 189.4 184.9
Debtors 19,298 19,370 20,097 21,010 Working capital cycle (days) 122.0 146.1 150.2 145.7
Loans and advances 31,062 32,808 34,765 36,965 Solvency ratios (x)
less: Current liabilities 26,727 24,278 25,021 26,322 Gross debt to equity 1.1 1.2 1.3 1.3
less: Provisions 403 315 319 355 Net debt to equity 0.7 0.8 0.9 0.9
Net working capital 27,393 31,549 33,748 35,164 Net debt to EBITDA 4.1 5.2 5.3 5.2
Total assets 40,918 46,177 49,490 51,991 Interest Coverage (on EBIT) 2.1 1.5 1.5 1.6
Construction 7
India Equity Research IVRCL
Analyst Certification
I, Devang Patel, PGDFA, research analyst and author of this report, hereby certify that all of the views expressed in this document accurately reflect our personal views about the
subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific
recommendations or views expressed in this document.
Disclaimer
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Disclosure of Interest Statement (as of November 18, 2011)
Analyst ownership Avendus or its associate company’s Investment Banking mandate with
of the stock ownership of the stock associate companies of Avendus
Hindustan Dorr Oliver No No No
IVRCL No No No
IVRCL Assets and Holdings No No No
Larsen and Toubro No No No
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Construction 8
