IVRCL from Angel Broking
IVRCL Infrastructure CMP: Rs380 Target Price: Rs473 (12 Months)
A clean ‘Infra’ dive IVRCL is one of the leading players in the water management sector in India. IVRCL’s water-related business contributes 68% of its total order book of Rs9,820cr and more than 50% of its revenues. We expect strong order book to drive growth going ahead. At Rs380 the stock trades at a 25% discount to its peers NCC and HCC. Our SOTP Target Price for IVRCL is Rs473. We have valued IVRCL’s standalone business at Rs320 assigning a PE of 16x FY2009E EPS of Rs20. IVRCL’s BOT projects, majority stake in Hindustan Dorr Oliver (HDO) and IVR Prime Urban Development (IVR PUDL) contribute Rs28, Rs15 and Rs110 to our Target Price, respectively. We initiate coverage on the stock with a Buy recommendation and Target Price of Rs473.
1 Robust Order Book provides revenue visibility: IVRCL has a strong order book of Rs9,820cr, which is 4.1x FY2007 sales of Rs2,379cr. The major stress is on water-related projects (68% of order book), which is IVRCL’s core competency. IVRCL, along with its subsidiary HDO has the required skills and expertise for effluent treatment and de-salination projects. Transportation (17%), Power (10%) and Buildings (5%) constitute the rest of the company’s order book. We expect IVRCL to register a CAGR growth of 37% in revenue over FY2007-09E on the back of its strong order book.
2 Aggressive strategy in place to bid for high-margin BOT/BOOT projects: IVRCL plans to aggressively focus on BOT projects. Currently, IVRCL has four BOT projects in hand. These BOT projects enjoy IRRs of 18-20%. These projects have been valued by us by discounting future cash flows from the projects individually. The BOT projects would contribute Rs28 to our Target Price.
3 Foray into Real Estate to enhance valuation: IVRCL has forayed into real estate through its subsidiary, IVR PUDL. The company has a landbank of 2,479 acres, which equates to saleable area of 76million sq ft. We have valued IVR PUDL on an NAV basis. Further, we have assumed a 15% discount to current realty prices. IVR PUDL contributes Rs110 to our Target Price
4. IVRCL has a 52.8% stake in subsidiary, Hindustan Dorr Oliver, which is engaged in engineered solutions, technologies and EPC installations in liquid solid separation applications HDO currently has an order book of Rs530cr, which is 2.5x its FY2007 sales. We have valued HDO by assigning a P/E of 12x FY2009E EPS of Rs8.7. Hence, HDO’s market cap works out to Rs377cr in which IVRCL has 52.8%, which equates to Rs199cr and adds Rs15 to our Target Price.
Investment concerns 1. Low promoter stake: 2. Withdrawal of Tax benefits following clarification on 80-IA to result in cash outflow: 3. Project risks: 4. High dependence on government expenditure: 5. Rising Raw Material prices:
Outlook The future holds great opportunities for the infrastructure players as can be concluded from the allocations to the infrastructure sector in the Union Budget 2007-2008. Allocation for Bharat Nirman has increased 31.6% from Rs18,696cr to Rs24,603cr, which will bring in huge orders for the construction players across the board. Allocation for the Rajiv Gandhi Drinking Water Mission has also increased from Rs4,680cr to Rs5,850cr while total allocation for the Sanitation Campaign has increased from Rs720cr to Rs954cr. This is expected to greatly benefit leading water related players like IVRCL. Allocation for National Highways Development Program (NHDP) was enhanced in Budget 2007-2008 to US $2.8bn, up 26.5% yoy. The state highways and roads are also throwing up investment opportunities with Maharashtra and Andhra Pradesh taking the lead. Nevertheless, it may be noted current levels of investments in infrastructure is insufficient to sustain the GDP growth of 8%. Investments in infrastructure have been around 4.5% of GDP as against the estimated requirement of 7-8% as per the Approach Paper for the XIth Five Year Plan. According to government estimates, lack of adequate infrastructure has depressed the GDP growth by 1.5-2%. India requires investments of around US $475bn in Infrastructure by 2012, of which about US $125bn is expected to come from the private sector.
Valuation At Rs380, IVRCL’s market cap works out to Rs4,928cr while its subsidiaries (IVR PUDL and HDO) would contribute Rs1,688cr and the BOT projects Rs378cr. Hence, IVRCL’s market cap post adjusting for the subsidiaries and BOT projects works out to Rs2,862cr, which is 11x FY2009E Net Profit of Rs270cr. At these valuations, the stock trades at a discount to its peers HCC and NCC. Further, an experienced and competent management, high revenue visibility and good execution track record justifies our belief that the stock should be trading at par with its peers. We initiate coverage on the stock with a Buy recommendation and Target Price of Rs473.
