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Published by tanmaypurohit
Recent Research Report On IVRCL INFRA By Deutsche Bank
Recent Research Report On IVRCL INFRA By Deutsche Bank

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Published by: tanmaypurohit on Jun 14, 2009
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11 June 2009
How much can Promoterdilute? Downgrade to Sell
Deepak Agrawala
Research Analyst(+91) 22 66584214deepak-m.agrawala@db.com
Manish Saxena
Research Analyst(+91) 22 6658 4034manish.saxena@db.com
Sandeep Palgota
Research Associate(+91) 22 6658 4056sandeep.palgota@db.com
Dilution concerns eased, operating FCF remains negative; Sell
IVRCL's stock has seen a run-up by 95% over the last month in line with the BSERealty Index and stocks with comparatively weaker balance sheets. This appearsto be on an easing of investor worries about the liquidity environment. While near-term worries on equity requirement for growth can be met, our worries stem from1) the business’ ability to generate and sustain positive FCF, and 2) the extent offurther dilution in Promoter’s holding, currently at 9.7% at our revised target priceof INR260/sh. We downgrade to Sell.
Forecasts and ratios
 Year End Mar 31 2007A2008A
Sales (INRm) 23,058.936,606.0
58,393.371,208.6EBITDA (INRm) 2,301.03,614.4
5,006.76,120.4Reported NPAT (INRm) 1,414.12,104.8
2,436.22,990.2DB EPS FD(INR) 11.9116.00
18.2522.40OLD DB EPS FD(INR) 11.9116.00
12.7917.77% Change 0.0%0.0%
42.6%26.0%PER (x) 24.825.8
20.216.5EV/EBITDA (x) 15.516.6
Source: Deutsche Bank estimates, company data 
DB EPS is fully diluted and excludes non-recurring items
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses theyear end close
Deutsche Bank AG/Hong KongAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's researchis available to customers of DBSI in the United States at no cost. Customers can access IR athttp://gm.db.com/IndependentResearchor by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARELOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Forecast ChangeSell
Price at 10 Jun 2009 (INR)
Price target - 12mth (INR)
52-week range (INR)
383.10 -63.85
BSE 30
Key changes
Rating Hold to Sell
 Price target 90.00 to 260.00
Sales (FYE) 49,720 to 48,819
Op prof margin (FYE) 8.7 to 7.7
Price/price relative
  6  /  0   7   9  /  0   7  1   2  /  0   7   3  /  0   8  6  /  0   8   9  /  0   8  1   2  /  0   8   3  /  0   9
IVRCL InfraBSE 30 (Rebased)
Performance (%) 1m 3m12mAbsolute
115.4 235.66.1
BSE 30
27.4 85.41.
Stock data
Market cap (INRm)
Market cap (USDm)
Shares outstanding (m)
Major shareholders
Promoter (9.6%)
Free float (%)
Avg daily value traded (USDm)
Key indicators (FY1)
ROE (%)
Net debt/equity (%)
Book value/share (INR)
Price/book (x)
Net interest cover (x)
Operating profit margin (%)
Related recent research Date
Indian Infrastructure: A pick-up in infrastructure 
 investments by private sector? 24 Mar 2009
Indian Infrastructure: Fiscal package - The start of fresh
set of investments 05 Jan 2009
Sharp price correction; 
 upgrade to Hold 01 Nov 2008
   C  o  m  p  a  n  y
   G   l  o   b  a   l   M  a  r   k  e   t  s   R  e  s  e  a  r  c   h
Management seems confident of demand revival
With new government in place, management appears decisively confident in theirguidance for FY10e, suggesting 20-40% yoy growth in order inflows primarilydriven by a pick-up in irrigation capex, especially in the states of Andhra Pradeshand Madhya Pradesh, cash contracts/annuity from roads, and power T&D. Weexpect negative FCF in FY10e despite assuming a constant operating margin and~33% revenue booking growth in FY10e.
Would Promoter’s stake fall below 5%?
Over the past five years, Promoter’s equity stake has fallen from 30% to 9.7%,and this has contributed to 70% accretion in net worth. We are worried that acontinuation of a similar strategy could lead to Promoter’s stake falling below 5%over the next 2-3 years. Despite our revised EPS at INR18.2 for FY10e andINR22.4 for FY11e, they are largely in line with consensus.
Downgrade to Sell with revised target price of INR260/sh (-21% downside)
We value the core business at PE of 12x FY10e (earlier 4x) on an improveddemand outlook and easing of equity raising scenario. We value BOOT projects atNPV at CoE of 14% (earlier 16%) and listed subsidiaries at market price. Keyupside risk: if management brings in any strategic/financial partner at significantpremium valuations, there could be a sharp uptick in the stock price, andmanagement’s increased focus on generating positive FCF from operations couldlower the equity requirement in the medium term. See pages 7-8.
11 June 2009 Infrastructure IVRCL InfraPage 2 Deutsche Bank AG/Hong Kong
Fiscal year end 31-Mar
200620072008 2009E2010E2011EFinancial Summary
DB EPS (INR) 9.6511.9116.00 16.9318.2522.40Reported EPS (INR) 9.6511.9116.00 16.9318.2522.40DPS (INR) 1.401.401.40BVPS (INR) 44.3101.9120.3 137.0153.6174.4Weighted average shares (m) 96119132 133134134Average market cap (INRm) 14,17335,08754,266 49,23849,23849,238Enterprise value (INRm) 15,79135,63759,910 58,37261,54364,514
Valuation Metrics
P/E (DB) (x) 15.224.825.8 21.820.216.5P/E (Reported) (x) 15.224.825.8 21.820.216.5P/BV (x) 6.272.873.33 2.692.402.12FCF Yield (%) nmnmnm nmnmnmDividend Yield (%) (x) (x) 11.815.516.6 13.812.310.5EV/EBIT (x) 12.817.118.2 15.613.811.7
Income Statement (INRm)
Sales revenue 14,95723,05936,606 48,81958,39371,209Gross profit 1,8003,2205,261 5,0946,0757,456EBITDA 1,3432,3013,614 4,2185,0076,120
Depreciation 110216328 473533612Amortisation 000 000
EBIT 1,2332,0853,286 3,7454,4745,508
Net interest income(expense) -253-308-478 -1,306-1,376-1,722Associates/affiliates 000 000Exceptionals/extraordinaries 000 000Other pre-tax income/(expense) 577445 299150200
Profit before tax 1,0371,8502,853 2,7383,2483,986
Income tax expense 108436749 478812996Minorities 000 000Other post-tax income/(expense) 000 000
Net profit 9301,4142,105 2,2602,4362,990
DB adjustments (including dilution) 000 000
DB Net profit 9301,4142,105 2,2602,4362,990
Cash Flow (INRm)
Cash flow from operations -3,420-694-4,336 -2,824-1,702-1,251
Net Capex -527-1,253-1,618 -800-750-1,000
Free cash flow -3,946-1,947-5,954 -3,624-2,452-2,251
Equity raised/(bought back) -1,43285-28 000Dividends paid 000 000Net inc/(dec) in borrowings 4,315-1,2255,117 3,3223,72521,786Other investing/financing cash flows 000 000
Net cash flow 0-3,088-865 -3021,27319,535
Change in working capital -4,470-2,339-6,820 -5,571-4,671-4,85
Balance Sheet (INRm)
Cash and other liquid assets 2,4432,2381,729 1,0041,5592,648Tangible fixed assets 1,3732,4353,733 4,0604,2774,665Goodwill/intangible assets 000 000Associates/investments 2,7652,8293,409 3,9793,9793,980Other assets 11,09920,59627,102 38,38744,41951,586
Total assets 17,68028,09835,973 47,42954,23362,879
Interest bearing debt 6,8275,61710,782 14,11717,84321,904Other liabilities 6,0849,2649,132 15,02015,88017,695
Total liabilities 12,91014,88119,913 29,13733,72339,598
Shareholders' equity 4,77013,21716,060 18,29220,51023,280Minorities 000 000
Total shareholders' equity 4,77013,21716,060 18,29220,51023,280
Net debt 4,3833,3799,053 13,11316,28419,25
Key Company Metrics
Sales growth (%) 43.354.258.8 33.419.621.9DB EPS growth (%) 487.223.534.3 5.87.822.7EBITDA Margin (%) Margin (%) ratio (%) (%) 21.115.714.4 13.212.613.7Capex/sales (%) (x) debt/equity (%) 91.925.656.4 71.779.482.7Net interest cover (x)
Source: Company data, Deutsche Bank estimates 
Model updated:08 June 2009
Running the numbersAsiaIndiaInfrastructure
Reuters: IVRC.BO Bloomberg: IVRC IN
Price (10 Jun 09) INR 368.85Target price INR 260.0052-week Range INR 63.85 - 383.10Market Cap (m) INRm 49,238USDm 1,042
Company Profile
IVRCL Infrastructures & Projects Ltd is a constructioncompany engaged in building buildings, bridges, pipelines,marine construction, canal modernization and road works.IVRCL group is also involved in various real estate projectsand also has ownership of many BOOT projects.
Price Performance
Jun 07Nov 07May 08Nov 08Apr 09
IVRCL InfraBSE 30 (Rebased)
Margin Trends
EBITDA MarginEBIT Margin
Growth & Profitability
Sales growth (LHS)ROE (RHS)
Net debt/equity (LHS)Net interest cover (RHS)
Deepak Agrawala
+91 22 66584214 deepak-m.agrawala@db.com
11 June 2009 Infrastructure IVRCL InfraDeutsche Bank AG/Hong Kong Page 3
Investment thesis
We downgrade IVRCL to Sell with a revised target price of INR260/sh. The macro demandenvironment appears to be positive, and we believe that guidance for order inflow growth of+20% in FY10e looks achievable. We have raised earning estimates by 43% in FY10e and26% in FY11e. However, with absolute performance of 95% in the past month, most of theearnings upside from a demand revival seems to be in the price. With the easing liquidityscenario, the near-term worries on management’s ability to raise equity appear to havereduced. However, we remain concerned about:
Continual negative free cash flow from operations. Our cash flow analysis suggests thatmanagement needs to raise debt to about INR3.7bn in FY10e to attain our estimates.This assumes net working capital at about 49% of sales – among the highest in theIndian construction industry.
Our simple scenario analysis shows that if management were to meet its guidance of35% yoy revenue growth and if WC/sales increases by 5-10% (base case = 49%), thendilution of ~2-5% at the current price of INR330/sh could be required to maintain adebt:equity of 1:1.
In the last month, IVRCL’s stock has outperformed the broader BSE Sensex by 68%,implying that the positives from the demand increase are largely priced in.
We value IVRCL on an SOTP basis. IVRCL has two businesses – a contracting business and adeveloper business. We value the core contracting business at 12x FY10e (earlier 4x), as theequity funding requirement for the company has considerably eased and the demandscenario has improved significantly. Furthermore, this multiple is in line with other mid-capconstruction companies. The developer business can broadly be divided into two listedsubsidiaries and four unlisted subsidiaries. We value the unlisted subsidiaries (i.e. the BOOTroad project and the desalination project) at NPV of the project’s cash flows at a CoE of 14%(reduced from 16% due to a reduction in equity risk premiums), based on our forecast of arisk-free rate of 8.1%, our forecast for a risk premium of 5.4% and a beta of 1.1. We estimatethis value to be INR29/sh. The listed subsidiaries (i.e. IVR Prime and Hindustan Dorr Oliver)have been valued at current market value, which gives a value of INR45/sh. Overall we use aconglomerate discount of 10% to reach our 12-month target price of INR260/sh.
Key upside risks include management’s ability to bring in any strategic/financial partner atsignificant premium valuations from which there could be a sharp increase in the stock price.Furthermore, if management increases its focus on generating positive free cash flow fromoperations, the equity requirement in the medium term could drop. A further upside risk is animprovement in cash collection lowering working capital intensity.As per our sensitivity analysis, if order inflows are 10% higher than our estimates, then EPSwould increase by 5% in FY10e. If the order execution cycle improves leading to revenuerealization 10% higher than our estimates, then EPS would increase by 24% in FY10e and17% in FY11e. A 100bps fall in EBITDA margins could lead to a 16% drop in EPS in FY10e.

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