The news of a possible hostile takeover of IVRCL by the Essel Group has boosted the company’s share price by 31 per cent in the past month. Notably, there are more gains in the offing, say experts. After buying from the secondary market, the Group holds 12.3 per cent in IVRCL, a little over the 11.18 per cent held by the promoters. Market experts believe it will take a while before clarity emerges on this front as the existing promoters will most likely defend their interest in IVRCL while Essel will keep an eye on acquiring additional shares. In fact, reports indicate the Essel Group is offering Rs 90 a share to institutional investors if they wanted to tender their holding in IVRCL.
Whatever happens, these developments suggest there is good news for IVRCL’s shareholders, as there could be more upside for the stock. “It seems to be a hostile takeover. I doubt how much capacity existing promoters have. But as this goes on, the existing shareholders will benefit,” says Ambareesh Baliga, chief operating officer at Way2Wealth.
Advantage shareholders
At the current share price, IVRCL commands a market capitalisation of Rs 1,920 crore, a little less than 1x its shareholders’ fund or book value of Rs 1,987 crore. If one adds the value of its 55.28 per cent stake in listed company, Hindustan Dorr-Oliver, the share prices of which are up 40 per cent in the last month and locked at 10 per cent upper circuit on Monday, and IVRCL’s 75.72 per cent stake in another listed arm, IVRCL Assets, the total value (book value plus value of subsidiaries) works out to Rs 3,017 crore or about 50 per cent more than its current market capitalisation. IVRCL had invested Rs 558 crore to acquire these two companies.
| POTENTIAL UPSIDE | |
| In Rs crore | |
| A) Book value | 1,987.40 |
| Hind. Dorr-Oliver Mkt-cap | 374.00 |
| Stake in Hind. Dorr (%) | 55.28 |
| B) Value of stake | 206.75 |
| IVRCL Assets Mkt-cap | 1,087.00 |
| Stake in IVRCL Assets (%) | 75.72 |
| C) Value of stake | 823.08 |
| Total value (A+B+C) | 3,017.22 |
| Mkt-cap of IVRCL @ 90/share | 2,403.00 |
| IVRCL’s current market cap | 1,920.00 |
It is not just the price but also the business which is attracting the acquirer. Baliga says, “Remember, Essel is not an investor. They are buying a business and if they are willing to pay that much, there has to be some business sense to this. I do not think the investors should sell the stock at this juncture.”
On the business front, analysts believe the Essel Group is taking a slightly longer view. That’s because, in the near to medium term, execution and high debt in IVRCL’s books are key concerns, which is why its shares have traded at such low valuations for a long time.
Meanwhile, the company has seen improvement in the order book, which now stands at Rs 23,000 crore or almost 4.5 times its 2010-11 revenues and provides good visibility. While the key challenge is execution, reflected in the falling turnover to gross block (gross fixed assets) at 6.8 times in 2010-11 from 10.5 in 2006-07, things could improve next year. “I think, next financial year onwards, execution should improve in the light of expected easing in interest cost, improvement in realisations and renewed focus on the business, which is good from the working capital perspective and for return ratios,” says Amit Srivastava, who tracks IVRCL at Nirmal Bang Equities.
Srivastava is expecting about Rs 6,600 crore in revenue in 2012-13, over eight times its gross block. The next year is also crucial from the leverage point of view. The company had consolidated debt of Rs 4,305 crore (debt-equity ratio of 1.6 times) as on March 2012. High leveraging is keeping its earnings down. However, if interest rates ease and execution improves, the pressure on this front could ease substantially. Also, the company is in the news regarding its plans to sell four BOT (build-operate-transfer) road assets, which could yield about Rs 500 crore. This could help unlock some funds, thereby providing liquidity for speeding execution and repaying debt.