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Spark Capital: IVRCL - Asset sale to provide near term relief but structural concerns remain, Maintain Reduce




Spark Capital Advisors(India) Private Limited


03 Apr 2013





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Asset sale to provide near term relief but structural concerns remain, Maintain Reduce IVRCL announced the sale of three road BOT projects to TRIL Roads (a Tata Company). The three road projects include two operational (Kumarapalayam and Salem Tollways) and one under construction road project (Chengapalli Tollways). While the valuation of the sale has not been announced yet as clearances from the NHAI and lenders are awaited, we have conducted a sensitivity analysis on the possible valuations of the three road projects and its impact on the core construction business’ debt, interest position and valuation. Based on our market interactions, we believe the valuation of the projects could range between 0.9x to 1.3x times price to book. But given current industry conditions and the company’s stretched balance sheet position, we expect the transaction value to tend towards the lower range of the valuation band (Sensitivity Analysis table in page 2). We expect the proceeds from the sale of the road projects to be used partly to reduce debt, augment working capital position and fund under construction road projects. While this is expected to be a near term positive, persistent delays due to right of way and procedural issues in the under construction and recently acquired road BOT projects are expected to keep possibilities of further monetization uncertain. Given continued slow progress in execution due to clearance issues, client side and payment delays in the EPC business, we expect revenue growth to remain muted and improve to 10% growth in FY14E only over a low base. Considering the operational concerns in the core business and delays in rest of the road BOT projects we maintain our ‘Reduce’ rating on the stock. Our revised SoTP based TP is Rs. 21 which includes Rs. 12/share and Rs. 1/share for its BOT/realty assets and HDO’s stake respectively. Asset sale a near term positive, but delays in other road projects a concern – We expect the sale of assets to be a near term positive and expect the proceeds from the sale to be used for a combination of reducing debt, improve working capital position and fund under construction projects. While the management expects to sell another three road/water BOT projects over the next six months, we expect clearance and procedural issues to keep risks of execution delays high and hence impact pace of monetization Working capital position in core business to remain stretched – Our industry interaction suggests that payment cycle has continued to remain stretched, especially from government related projects. Given that water, irrigation and road segments contribute ~70% of the order book, we expect working capital cycle to remain stretched for IVRCL in FY14E at 155-160 days despite the infusion of funds from the asset sale.

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