IVRCL INFRASTRUCTURES – Kotak Securities Research Report

Kotak Securities are bullish on IVRCL INFRASTRUCTURES and have recommended a BUY with the following investment rationale:

Order inflow momentum of IVRCL INFRASTRUCTURES continues to stay strong

IVRCL INFRASTRUCTURES has recently bagged two orders in the road segment – Sion-Panvel highway and Karanji-Wani-Ghuggus-Chandrapur road project. IVRCL INFRASTRUCTURES had been lowest bidder in Sion-Panvel project from a long time and this project involves improvement of Sion-Panvel Special State highway from BARC junction to Kalamboli junction. It is a strategic extension of Mumbai-Pune Expressway by another 25 km and consists of 10 lane main carriageway in rigid pavement, widening of existing and new creek bridges, flyovers, underpasses and foot over bridges etc. Total cost of this project is nearly Rs 15 bn with concession period of 17 years and 5 months including construction period which is expected to be completed by FY14.

For Karanji-Wani-Ghuggus-Chandrapur road project, scope of the work of IVRCL INFRASTRUCTURES would include four laning and improvement of this stretch on DBFOT basis. Total cost of the project is Rs 7.5 bn and government grant component of Rs 2.3 bn. Construction of these projects is likely to be executed by IVRCL INFRASTRUCTURES. These projects have not achieved financial closure, so we have not included any valuations in our target price.

Thus with an order book of nearly Rs 240 bn diversified across water, transportation, power, building and industrial and oil & gas, we expect revenue growth trajectory of IVRCL INFRASTRUCTURES to be maintained.

Revenue growth to pick up during H2FY11

Revenue growth of IVRCL INFRASTRUCTURES was impacted during Q1FY11 due to loss of revenues of Rs 750 mn in Indore based project, Rs 500 mn in AP irrigation project and Rs 1250 mn in IOCL Tankage project. These revenues are expected to be booked in the coming quarters. However, due to better than expected monsoon seen in Q2FY11 as against Q2FY10, we expect overall execution to be impacted in Q2FY11. But with a strong order book of nearly Rs 240 bn, we expect revenue execution to pick up from H2FY11. We thus maintain our estimates and expect revenues to grow at a CAGR of 19% between FY10-FY12.

Working capital cycle, though improved in FY10, witnessed a jump in Q1FY11

For FY10, average working capital cycle of IVRCL INFRASTRUCTURES improved as compared to FY09. This was mainly due to decline in loan and advances days coupled with increase in customer advances as well as creditor days. As a result, net working capital stood at 40.6% of net sales for FY10 as against 46.5% seen in FY09. However, during Q1FY11, with large number of projects in mobilization stage, working capital of IVRCL INFRASTRUCTURES witnessed a jump and hence overall borrowings witnessed an increase.

Status of BOT projects

IVRCL INFRASTRUCTURES is carrying out BOT projects through IVR Assets and Holdings Ltd.