Bid, own and gain

PUBLIC ISSUE

A healthy order-book and the government's thrust on water projects are clear positives for IVRCL.

If you think the infrastructure in this country really sucks and it can only get better, IVRCL is not a company you can ignore.

This Hyderabad-based company - which builds water pump houses and transmission lines apart from roads, bridges, industrial structures and power projects - is waiting with orders worth Rs 2,500 crore. Last year, the company clocked sales of Rs 773.45 crore.

Now IVRCL is knocking the markets with its second public offer of 2.05 crore equity shares to collect Rs 145 crore. The company's shares are traded at Rs 483 and the public offer is priced in the band of Rs 385-415, a discount of 16 per cent to the prevailing price. The deal is attractive for investors looking for quick gains.

Looked at another way the stock may look a bit too expensive. The average traded price of IVRCL at the bourses in the past one year was only Rs 247.

Also, the company made a preferential allotment of 62.4 lakh shares (59 per cent of its equity) in April 2004 to Citicorp International and Chryscapital at Rs 125 per share. Compared to this the offer price looks ambitious.

But that need not worry you. Based on the higher end of the issue price, the stock is valued at 14.8 times its earnings this year. That is lower than the valuations its peers command - Hindustan Construction (20.9), L&T (16) and Nagarjuna Construction (17.2).

Again, IVRCL's earnings per shares (EPS) stood at Rs 19 for the nine months ended December 31, 2004. Analysts expect the company to grow its earnings around 30 per cent per annum over the next two years. After accounting for the 20.7 per cent dilution in its equity post-issue, IVRCL is likely to achieve an EPS growth of around 20-25 per cent over the next two years. So the stock looks promising.

Says Jaspreet Singh, analyst with Angel Broking, "the issue makes sense if one wants to make listing gains. If you already own shares, you can sell them and apply in the issue."

IVRCL grew revenues and net profit by 75 per cent and 152 per cent respectively in FY04 and is expected to close the current fiscal with a revenue growth of 30 per cent and net growth of 20 per cent. The company has orders worth Rs 2,545 crore, up 55 per cent against last year.

One worry, however, is declining operating margins, which are down to 7.46 per cent from 9.93 per cent in FY03. A major reason for this squeeze in margins is the rising price of building material.

"Rising prices of cement and steel will threaten the company's profit margins for the next two quarters," says Sumeet Mehta, analyst at Fortis Securities.

This is because nearly a fourth of IVRCL's contracts are fixed-price ones where escalation in input costs cannot be passed on to the customer.

Besides, the company seems to have a bright future, especially in the water infrastructure segment. Right now it has orders worth around Rs 1,640 crore from such projects. The size of the opportunity is huge.

Sample this: in the Tenth Plan (2002-07), the government has allocated Rs 53,719.8 crore for water-related projects. The Andhra Pradesh government, too, has allocated Rs 49,000 crore for irrigation during the next five years.

On top of this is the budgetary allocation of Rs 6,500 crore this year and another Rs 2,000 crore which was not spent last year. IVRCL is poised to grab a sizable share of this business.

As Mehta says, "the renewed thrust on irrigation, especially in Andhra, should be a major growth driver for IVRCL."

IVRCL plans to spend a quarter of the money it collects through the IPO for purchasing capital equipment and about 40 per cent for repaying debt. A part of the money will be used for build, own and transfer (BOT) projects.

BOT means that the company puts in its own money to build the infrastructure, own its for a limited period when it can recover its costs and profits, and transfers it back to the government. Only companies with good financial muscle can get into such operations. For now, IVRCL is worth bidding for and owning. 
 

Peer comparison
(Rs crore)	Net sales	OPM (%)	Net profit	P/E (x)
IVRCL	705.69	7.95	33.16	15.90
HCC	1,031.62	10.26	28.49	21.20
Nagarjuna Const.	738.51	7.93	33.64	17.50
L&T	8,834.53	3.77	584.46	15.45
Gammon*	551.34	12.23	23.00	-
Figures are for 9 months ended Dec , 2004 * Figures are for half year ended Sep, 2004

Note: For the calculation of P/E, we have assumed FY05 earnings of Rs 28 per share and the issue price but did not account for the increased capital - which will hardly yield any returns - for FY05. However, going forward, based on the issue price of Rs 415, the stock quotes at a P/E of 13.8 and 9 for FY06 and FY07 respectively.

NEWS IMPACT

Madhucon Projects
Turnkey construction company, Madhucon Projects is witnessing good times these days. The spate of contract wins the company announced recently had the scrip running ahead at full steam.

The stock hit the upper circuit filter at 5 per cent on Wednesday after the company bagged its fourth big contract in a span of two days. The scrip closed the week at Rs 782.35, up 6.74 per cent for the week. It touched its 52-week high on Thursday at Rs 838. The stock has been surging of late on the back of the bullish outlook for construction sector stocks.

Madhucon Projects announced that the Andhra government awarded it two irrigation projects worth Rs 395.20 crore on a turnkey basis. The work on these projects is set to commence soon, and the entire work has to be completed within two years as per the terms of the order.

Recently, Madhucon also bagged a Rs 250 crore project in Rajasthan from the National Highway Authority of India (NHAI). On February 28, 2005 Reliance Energy Investments bought shares worth Rs 13.65 crore in the company.

The board of Madhucon had approved allotment of 3,50,000 shares of Rs 10 each at an issue price of Rs 390 per share (including the premium of Rs 380) to Reliance Energy Investments. The shares have been allotted on preferential allotment basis with a one-year lock-in period.

Bharti Tele-Ventures
Private telecom major Bharti Tele-Ventures lost ground as RBI put restriction on fresh FII buying in the scrip. The stock declined 7.87 per cent last week to close at Rs 207.70. It has been in the limelight of late.

Private equity investor Warburg Pincus on Monday sold 11.2 crore shares in a block deal to a couple of FIIs. Since then RBI restricted fresh FII buying as it triggered the permissible limit of 48 per cent.

Bharti Tele, however, has witnessed smart gains since December last after the company announced impressive profits. Its consolidated profit after tax jumped 131 per cent to Rs 372.64 crore in 2004 from Rs 161.29 crore in same quarter last year.

The company - India's top listed mobile services firm - will file documents with the Securities Exchange Commission for an ADR offering in a few months. Bharti has shareholder's permission for sponsoring an offer of upto 200 million shares.