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Asia

India

Transportation

Infrastructure

11 June 2009

IVRCL Infra

Reuters:

IVRC.BO

Bloomberg:

IVRC IN

Exchange:

BSE

Ticker:

IVRC

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

2009E

2010E2011E

Sales (INRm) 23,058.936,606.0

48,818.9

58,393.371,208.6EBITDA (INRm) 2,301.03,614.4

4,217.8

5,006.76,120.4Reported NPAT (INRm) 1,414.12,104.8

2,259.7

2,436.22,990.2DB EPS FD(INR) 11.9116.00

16.93

18.2522.40OLD DB EPS FD(INR) 11.9116.00

15.01

12.7917.77% Change 0.0%0.0%

12.7%

42.6%26.0%PER (x) 24.825.8

21.8

20.216.5EV/EBITDA (x) 15.516.6

13.8

12.310.5

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)

368.85

Price target - 12mth (INR)

260.00

52-week range (INR)

383.10 -63.85

BSE 30

15,127

Key changes

Rating Hold to Sell



Price target 90.00 to 260.00



188.9%

Sales (FYE) 49,720 to 48,819



-1.8%

Op prof margin (FYE) 8.7 to 7.7



-12.2%

Price/price relative

0150300450600

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 85.41.6

Stock data

Market cap (INRm)

49,238

Market cap (USDm)

1,042

Shares outstanding (m)

133.5

Major shareholders

Promoter (9.6%)

Free float (%)

Avg daily value traded (USDm)

18.0

Key indicators (FY1)

ROE (%)

13.2

Net debt/equity (%)

71.7

Book value/share (INR)

137.02

Price/book (x)

2.7

Net interest cover (x)

2.9

Operating profit margin (%)

7.7

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) 0.001.001.40 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 (%) 0.00.30.3 0.40.40.4EV/Sales (x) 1.11.51.6 1.21.10.9EV/EBITDA (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 -5,571-4,671-4,853

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 13,11316,28419,255

Key Company Metrics

Sales growth (%) 43.354.258.8 33.419.621.9DB EPS growth (%) 487.223.534.3 5.87.822.7EBITDA Margin (%) 9.010.09.9 8.68.68.6EBIT Margin (%) 8.29.09.0 7.77.77.7Payout ratio (%) 0.08.48.8 8.37.76.3ROE (%) 21.115.714.4 13.212.613.7Capex/sales (%) 3.55.44.4 1.61.31.4Capex/depreciation (x) 4.85.84.9 1.71.41.6Net debt/equity (%) 91.925.656.4 71.779.482.7Net interest cover (x) 4.96.86.9 2.93.33.2

Source: Company data, Deutsche Bank estimates

Model updated:08 June 2009

Running the numbersAsiaIndiaInfrastructure

IVRCL Infra

Reuters: IVRC.BO Bloomberg: IVRC IN

Sell

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

0150300450600

Jun 07Nov 07May 08Nov 08Apr 09

IVRCL InfraBSE 30 (Rebased)

Margin Trends

7.68.08.48.89.29.610.010.4

06070809E10E11E

EBITDA MarginEBIT Margin

Growth & Profitability

02040608006070809E10E11E0510152025

Sales growth (LHS)ROE (RHS)

Solvency

02040608010006070809E10E11E02468

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

Outlook

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.

Valuation

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.

Risks

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.