IVRCL: A core player floats

The government's emphasis on infrastructure will help IVRCL.

IVRCL Infrastructures & Projects is leveraging the current investor appetite for the infrastructure sector and its forthcoming IPO is at a price band of Rs 385 to Rs 415 per share. The issue aggregates Rs 126 crore.

The company's expertise in highway projects and expanding water supply facilities has helped it to grow its income from operations by 75.65 per cent to Rs 773.45 crore in FY04.

IVRCL is offering its stock at a P/E of about 11 (assuming the higher end of the band), while other players like HCC trade at 22 times and Nagarjuna Construction at 17 times.

The company plans to use the resources raised for financing its investments for BOT/BOOT projects, primarily infrastructure projects for roads, bridges and water. In addition, funds would also be deployed to purchase capital equipment and repay loans.

However, the underlying concern regarding the company is the rising cost of key inputs like cement and steel. Impact of higher input costs were visible in FY04 also, with construction expenditure rising 80.73 per cent.

While a larger turnover helped operating profit grow 46.5 per cent to Rs 63.56 crore in FY04, it could not prevent operating profit margins falling 172 basis points to 8.21 per cent.

These margin concerns are likely to remain, as about twenty six per cent of the projects currently being implemented and aggregating approximately Rs 575 crore, as on November 30, 2004, are fixed-price contracts.

However, investors would be keen to leverage the potential opportunities for IVRCL with the India Infrastructure Report estimating total infrastructure spending of around $130 billion over the next five years.

A larger turnover for the company could help it to minimise the anticipated rise in input costs, going forward. With several stocks in the infrastructure segment having risen sharply over the last 6 months, the potential listing premium for IVRCL could certainly attract investors to this IPO.

Manufacturing growth still robust

Manufacturing growth for January was 9.3 per cent, the first time since October that growth has been above 9 per cent.

The strength of the manufacturing sector has been the mainstay behind the higher IIP growth of 8.0 per cent in January, considering that growth in both the mining and electricity sectors slowed during the month.

So far, growth has been broad-based, spanning consumption and exports as well as being investment-driven. For instance, the highest growth over the April 2004 to January 2005 period has been seen in the category "Machinery and Equipment other than Transport Equipment" which has grown by 20.9 per cent.

In January, this category, which is clearly linked to investment demand, grew by 12.1 per cent. Also, basic metal and alloy industries grew by 11.1 per cent and 13.2 per cent in December and January respectively.

On the other hand, items such as textile products were up 16.4 per cent over April-January, but up a huge 30.8 per cent in January. This category had grown by 38.2 per cent in December. Clearly, the scrapping of the MFA quotas has had an enormous impact on the sector, and on textile exports.

The IIP data for January shows that manufacturing strength continues, despite predictions about the base effect catching up. Manufacturing had grown by 7.5 per cent in January 2004, and a growth of 9.2 per cent on that base is commendable.

While February data for commercial vehicles, cars and the telecom industry suggest a slow down in these sectors, the buoyancy in other segments may throw up some positive surprises this quarter.

i-flex solutions

i-flex solutions' product Flexcube has been ranked the world's number one core banking solution by IBS for the third year in succession. The markets, however, have hardly been enthused - the i-flex stock has dropped 4 per cent since the news.

That's because the ranking isn't reflected in better financials. In the nine months till December 2004, operating profit of the company's products business fell by about 5 per cent, despite a 15.5 per cent increase in revenues.

The rise in costs is mainly on account of investments on newer platforms and an increase in headcount. Unless revenue growth picks up from current levels, these investments would continue to be a strain on profitability.

The operating margin of the products division has been on the decline for some time - from 45 per cent in FY03, the margin fell to 41 per cent the next fiscal, and now stands at 33 per cent.

This has led to a massive underperformance in the company's share price - Since Jan 1, 2004, the stock has fallen over 28 per cent, even though NSE's IT index has risen around 23 per cent in the same period.

Nevertheless, there are signs of a pick up in i-flex's product revenues growth. Its order tank, defined as license fees that are confirmed but not yet billed, has risen 25 per cent year-on-year to $44 million. Further, the company has announced deals with tier-I banks lately including one with Lloyds TSB Bank in September 2004.

i-flex continues to be the best play in the banking products space. Also, at an FY06 EV/EBITDA multiple of about 12.5 times, it now trades at a considerable discount to top-tier companies in the IT sector.

With contributions from Amriteshwar Mathur and Mobis Philipose