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Spark Capital: IVRCL Mar'13 quarter Results Review - Multiple headwinds prevail, Maintain Reduce




Spark Capital Advisors(India) Private Limited


05 Jun 2013





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Multiple headwinds prevail, Maintain Reduce IVRCL reported revenue de-growth of 6.5% yoy to Rs. 14.9bn with EBITDA margin of 8.8% and a PAT of Rs. 61mn which was primarily boosted by Rs. 350mn of gain from sales of land (Noida). While order book has remained healthy at Rs. 270bn (5x FY15E book-to-bill), slow progress in execution due to clearance issues, client side and payment delays have continued to keep revenue growth suppressed. We expect revenue growth to remain muted in FY14 (~2% yoy growth) and improve to 6% growth in FY15E 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. Regarding the sale of three BOT road projects, while IVRCL is expected to complete the sale of the two operational road projects to TRIL in the near term, it is expected to completely exit from the third project (Chengapalli Tollways) only after the completion of construction. Given weak execution pace, margin concerns, high reliance on debt expected to continue (working capital requirement) and delays in execution of BOT projects, we continue to maintain our negative stance on the stock. Our revised SoTP based TP is Rs. 16 which includes Rs. 12/share and Rs. 1/share for its BOT/realty assets and HDO’s stake respectively. We maintain our ‘Reduce’ rating on the stock. Highlights of the quarter’s performance Execution issues to keep growth outlook muted – In spite of sizeable order book of Rs. 270bn, execution in the core business continued to remain muted due to slow moving orders, payment and procedural delays. While EBITDA margin (8.8%) was better than expected during the quarter, going forward it is likely to remain under pressure (~6.8-6.9%) due to execution of low margin contracts and higher operation costs Under construction BOT projects to maintain pressure on debt – While the sale of three operational road BOT projects is expected to ease funding requirements in the near term, the under construction and recently secured BOT road projects require ~Rs. 10bn of equity (Rs. 2bn in FY14E). This, combined with high working capital requirements, are expected to keep pressure on debt (Rs. 25.8bn in FY15E) and interest costs high (8% of revenue in FY15E) Working capital requirements to stay high – 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 at elevated levels (~155days) going forward

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