IVRCL has seen an erosion of 70 per cent, or Rs 2,500 crore, in its market capitalisation since January 2011, though it got some respite recently, led by an improvement in overall market sentiment. It has been in the news for plans to sell stake in infrastructure assets, monetise its land bank, merge listed subsidiary IVRCL Assets & Holdings with itself and, more recently, order wins.
These are some positives from the perspective of IVRCL’s high debt, a key reason for its current low valuations. After adjusting debt against total assets and investments, its residual value works out to Rs 3,400 crore, against market capitalisation of Rs 1,022 crore (at Rs 38.25 a share).
Analysts say these low valuations are consequent to fears that IVRCL may not be able to manage its debt in the coming days. Apart from the above positive events, the promoters have also increased their stake in IVRCL by 166 basis points in the last six months, though they still hold only 11.18 per cent.
Given the peaking interest rate cycle and value in the core business (including healthy order inflow), investors with a high appetite for risk can consider the stock from a medium-term perspective, while monitoring project execution and progress over its asset sale plans.
| UPTICK IN 2012-13 | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Sales | 5,651 | 5,402 | 5,750 |
| Y-o-Y change (%) | 2.9 | -4.4 | 6.4 |
| Ebitda (%) | 9.1 | 9.1 | 9.2 |
| Net profit | 158 | 90 | 96 |
| Y-o-Y change (%) | 34.0 | -43.0 | 6.7 |
| EPS (Rs) | 5.9 | 3.4 | 3.6 |
| PE (x) | 6.3 | 10.9 | 10.3 |
| Price/Book Value (x) | 0.5 | 0.5 | 0.5 |
| E: Estimates IVRCL’s standalone financials Source: Analyst reports | |||
High leverage, a key risk
The company had a consolidated debt of Rs 4,305 crore (debt-equity ratio of 1.6 times) at March-end. In addition to pressure on the core business, wherein sales growth has slowed and operating profits have fallen since the March 2011 quarter, high interest costs have shrunk earnings. Also, some debt has been deployed in assets, which are yet to contribute to revenues, adding to pressure on earnings.
Due to lack of sufficient internal cash accrual, the company has been borrowing for both working capital and investment requirements of its subsidiaries. Its receivables (net current assets) and debt increased by Rs 540 crore at the end of September, compared to March.
At this point, interest coverage at 1.5 times is low, and could get worse if the business fundamentals do not improve and IVRCL continues to rely on borrowed funds.
Different options
Higher debt and a weak business outlook have also raised concern over ability to repay debt. Cash flows from operating activities stood at Rs 201 crore in 2010-11 and were not expected to improve meaningfully in the near future. The company is expected to report standalone revenues of Rs 5,750 crore in 2012-13 and generate Rs 250 crore of cash from operating activities.
To lower debt, the company has been looking to raise funds through options like selling land and diluting stake in build-operate-transfer (BOT) infrastructure projects. In November, it announced plans to merge IVRCL Assets & Holdings, which has several BOT projects and real estate assets, with itself.
“The company is looking at options like selling land and getting into tie-ups for project execution. IVRCL is looking to sell about 1,600 acres of land in five cities — Bangalore, Pune, Chennai, Hyderabad and Visakhapatnam. The estimates had earlier valued this land parcel at Rs 2,500 crore,” said A K Prabhakar, senior vice-president, equity res-earch, Anand Rathi.
The company is also planning to sell 100 acres in Noida. This, along with plans to sell stake in any of the BOT projects, could fetch sizeable resources to deal with rising working capital needs and bring down debt substantially.
While these are positives, the market’s fears are unlikely to recede until these materialise. Any further delay in ongoing projects will also have a bearing on its profitability and could lead to stress on future repayments.
The road ahead
Meanwhile, on the business front, order inflow has been relatively healthy. Thanks to recent order wins, including projects from public and private (Tata Cummins and Jindal Steel) entities, the company is sitting on an order book of Rs 23,000 crore, which is almost 4.5 times its 2010-11 revenues and provides good revenue visibility. The fact that the company has been receiving orders from a diverse client base gives confidence about its core business.
Going ahead, key monitorables will include project execution and interest cost. A slowdown in execution led to a near flat standalone sales in the first half of 2011-12 at Rs 2,168 crore, leading analysts to cut their estimates. “We have cut our 2011-12 to 2013-14 estimated EPS (earnings per share) by up to 54 per cent, factoring in weaker execution and higher borrowing costs,” said Devang Patel, who tracks the company at Avendus Securities. This is also a reason that on the standalone basis, revenues and earnings are expected to grow only in single-digit.
