Focus on water-based segments and good prospects in other businesses will boost IVRCL Infrastructures’ growth rates in the next 2-3 years.
The country’s economic growth may be headed for a slow down, but not all segments are expected to face a similar situation. Over the last 15 days, IVRCL Infrastructures & Projects bagged three water and irrigation related projects with a combined value of Rs 1,632 crore. This is aided by the healthy prospects and rising investments needs of the water and irrigation based infrastructure segments.
Notably, the shortage of water-related infrastructure facilities, rapid urbanisation and need for improving agriculture-based infrastructure should continue to attract higher investment despite the constraint over government finances. To give some numbers, the allocation for spending on infrastructure related to agriculture was raised by 96.6 per cent to $57 billion in Eleventh Five Year Plan as against $29 billion in Tenth Five Year Plan. States like Andhra Pradesh alone have tripled their spending on agriculture related infrastructure to $29 billion, which is to be spent over the next ten years.
Core strength
In this light, IVRCL, which is a major player in the business, should emerge as a major beneficiary in the coming years. "We continue to acquire new projects and do not see any slowdown in the orders as far as water and irrigation projects are concerned," affirms Sudhir Reddy, MD, IVRCL Infrastructures.
Water related projects accounts for over 60 per cent of IVRCL's current total order book of about Rs 15,000 crore. The company undertakes projects related to irrigation, rural and urban water supply and sanitation and has a pan India presence. In this segment, the company has executed several projects for the government and industrial sector (mainly power, for companies like Neyveli Lignite and NTPC, for establishing water systems required in the thermal power plant).
As water remains a focus area, the company is further improving its capabilities to fully exploit the emerging opportunities in sector. The company is jointly executing a prestigious project, Chennai Sea Water Desalination project, worth Rs 490 crore with a Spanish company, which is considered to be first of its kind in the country. The execution of this project will further enhance its capability for upcoming projects of similar nature.
Growing synergies
The company has acquired a 70 per cent controlling stake in Hindustan Dorr Oliver (HDO), a listed domestic company. The acquisition enabled IVRCL to qualify and bid for large projects in the water and environment space, mainly for mineral, refineries, pharmaceuticals, fertiliser, chemical and pulp & paper industries.
The water treatment and environment space, too, has been experiencing high growth rates, which is why HDO's revenue has grown at 46 per cent annually during FY06-08. Considering its healthy order book (currently at Rs 980 crore) to sales of 3.2 times its FY08 revenue, HDO is expected to grow at about 40 per cent over the next two years. Even thereafter, this subsidiary should grow at fast clip given the growing requirement for water treatment and environment solutions from industrial segment and investments towards urban water infrastructure.
Pillars of growth
The company’s has also forayed into the real estate through its subsidiary, IVR Prime, where it holds a 62.3 per cent stake. IVR Prime has a land bank 3,244 acre with estimated saleable area of 85 million sq ft. The company is currently present in construction of residential, commercial and retail space, spread across different cities such as Chennai, Vizag, Bangalore, Pune, Nagpur, New Delhi and Hyderabad, with projects in some of these cities.
| STABLE NUMBERS | |||
| Rs crore | FY08 | 2009E | 2010E |
| Net sales | 3660 | 4950 | 6550 |
| OPM (%) | 9.9 | 9.5 | 9.5 |
| Net profit | 210.5 | 258.0 | 330.0 |
| EPS (Rs) | 15.8 | 19.3 | 24.8 |
| P/E (x) | 11.0 | 9.0 | 7.0 |
| Analysts estimates | |||
The revenues of IVR Prime have grown from Rs 136.4 crore in FY06 to Rs 614.3 crore in FY08. The company is planning to develop 12-13 million sq ft of space over the next 2-3 years. While this represents huge opportunity, analysts are however, concerned due to the high interest rate scenario and slowdown in the realty sector, which may result in some of its projects getting delayed.
As a part of its growth strategy, the company has further diversified into power. The company has executed several projects related to transmission lines, distribution and substations for the power distribution sector. With the increasing investments in power transmission and distribution, the power segment (accounting for about 16 per cent of IVRCL’s total revenue) is also growing at a healthy pace. While revenue from this segment has grown from Rs 303 crore in FY06 to Rs 545 crore in FY08, the current order book of about Rs 791 crore (1.45 times FY08 revenue) provides decent revenue visibility.
| SUM OF PARTS | |||
| Rs per share | High | Low | Average |
| Hind-Dorr | 19 | 10 | 13.1 |
| IVR Prime | 76 | 42 | 57.2 |
| BOT projects | 35 | 21 | 25.7 |
| IVRCL standalone | 398 | 304 | 346.7 |
| Total | 528 | 377 | 450.1 |
| Note: Figure are based on different analysts estimates The analysts have adopted diferent approaches while valuing per share value of the stake held by IVRCL in these companies | |||
Lastly, the company is also present in the transport and building segment, which accounts for around 30 per cent of total revenues. In the transport segment, the company constructs roads and currently has an order book of Rs 1,257 crore. The company is also construction three road projects on a BOT basis, worth Rs 1,080 crore, which are expected to be commissioned by May 2009. While in the building segments, the company undertakes projects related to the construction of the residential, commercial and industrial projects, it has an order book of about Rs 2,800 crore. The company's revenue from the building segment grew from Rs 175.1 crore in FY06 to Rs 420 crore in FY08.
Investment rationale
On the back of increasing investments in the water related projects and strong order book across businesses, which is four times the company’s FY08 revenue, IVRCL is expected to grow at about 33-35 per cent over the next three years. However, the pressure on account of rising interest costs is likely to result in earnings growing at 25 per cent annually during this period.
Little wonder, analysts have cut down their earnings estimates by about 9-10 per cent due to rising interest costs led by an increase in secured loans to Rs 578.8 crore in FY08 as compared to Rs 389 crore in FY07. This is already reflecting in interest cost, which has gone up and, as a result IVRCL reported a drop of 92 basis points in net margins at 4.7 per cent in Q1FY09 compared to 5.6 per cent in Q1FY08.
While there are concerns with regards to the rising interest cost and funding for new projects, the same is also reflecting in the current share price. Notably, after the recent market correction, the stock is trading at attractive valuations. Going by analysts estimates, the conservative value of the company is pegged at Rs 377 per share on the basis of sum of parts (see table: Sum of Parts), indicating good return potential from current levels.
