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Spark Capital: IVRCL Dec'12 quarter Results Review - Multiple uncertainties keep outlook muted, Downgrade to Reduce




Spark Capital Advisors(India) Private Limited


18 Feb 2013





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Multiple uncertainties keep outlook muted, Downgrade to Reduce IVRCL reported revenue growth of 5.4% yoy to Rs. 12.5bn with EBITDA margin of 3.6% and a loss of Rs. 681mn owing to a combination of cost over-runs in a few projects (Rs. 570mn), debtor write-offs (Rs. 110mn) and higher service tax (Rs. 80mn). Order book has de-grown over the past two quarters (from Rs. 271bn to Rs. 249bn) due to muted order inflow (Rs. 16.5bn in 1HFY13). Given continued slow progress in execution due to clearance issues, client side and payment delays, we expect revenue growth to remain muted in the rest of FY13 (~5-6% yoy growth) and improve to 10% growth in FY14E over a low base. On the back of weak execution, EBITDA margin is expected to remain subdued in the near term and improve only moderately from FY14E. Amongst the BOT projects, while the company is in advanced stages of finalizing the sale of three BOT road projects, under construction and recently secured BOT projects are facing delays due to right of way and procedural issues. Given weak execution pace, margin concerns, high reliance on debt expected to continue (working capital requirement) and delays in execution of BOT projects, we reduce our rating on the stock from ‘Add’ to ‘Reduce’. Our revised SoTP based TP is Rs. 27 which includes Rs. 17/share and Rs. 2/share for its BOT/realty assets and HDO’s stake respectively. Highlights of the quarter’s performance Execution and margin in core business to remain muted – In spite of sizeable order book of Rs. 249bn, execution in the core business continues to remain muted due to slow moving orders (road projects), payment and procedural delays. EBITDA margin has also trend downwards due to execution of low margin contracts and higher operation costs. Going forward, we expect margins to remain under pressure and expect EBITDA margin of 7.7% in FY14E Asset sale at hand, but new BOT projects getting delayed – While the company expects the sale of three operational road BOT projects in the near term, under construction and recently secured BOT road projects are facing increasing delays due to land and procedural issues. We expect sale of existing assets to improve the funding scenario for the new projects Debt continues to remain at elevated levels – Debt at the end of Dec’12 stood at Rs. 24.5bn and remains at elevated levels due to high working capital requirement on the back of payment and execution delays. Interest costs is expected to remain high (>8% of sales) in FY13E and is expected to improve only after the sale of BOT assets

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