Stock Review : IVRCL Infrastructures & Projects (IVRCL Infra)

 

 

THE stock price of mid-size infrastructure firm IVRCL Infrastructures & Projects (IVRCL Infra) is quoting at around 25% lower than its yearago level. It has also underperformed the index over the past three months.

   Even the reports of the company bagging order worth 1,100 crore has not helped its stock price much. The lack of investor interest stems from the company's lacklustre financial performance.

   The revenue has grown at a compounded annual growth rate, or CAGR, of 32% over the past three years but net profit has increased by only 10% on consolidated basis due to cost overruns related to project delays. (Results of subsidiary like IVRCL Assets and Holdings, and Hindustan Dorr Oliver are included in the consolidated figures). During the June 2010 quarter, IVRCL Infra registered a flat revenue growth, while net profit declined 21% on a year-on-year basis.

   On the positive side, the company has been able to reduce working capital cycle, which is a major concern in the infrastructure/construction sector. The percentage of net working capital to net sales declined to 40.6% in FY10 from 46.5% in the previous year.

   However, with a number of projects in the middle of execution, working capital has started inching up again in the first six months of the current calendar year. This raises some concern.

   IVRCL Infra implements projects in water resources, roads & bridges, buildings & industrial structures besides power & transmission sector. It had an order book of 24,000 crore as of June 30, 2010, which is over four times its revenue for the 12 months to end-March.

   A little over half of its order book is derived from water sector making it one of the biggest players in the irrigation infrastructure sector. To reduce its dependency on irrigation segment, IVRCL Infra has diversified into the road project over the past one year. The company has commissioned three road projects through its subsidiaries in the similar period.

   Going forward, the company expects to maintain its current growth rate in revenues with better execution in the irrigation projects besides focus on the road segment. But the better-than expected monsoon last quarter has led to further delays in execution which is likely to impact its earnings for the quarter ended September 30.

   The stock is trading 14 times its trailing 12 months earnings. This is lower than the P/Es of 17 for Nagarjuna Construction and 20 for Patel Engineering. Investors need to wait for at least two more quarters before they could see superior returns from IVRCL Infra's stock. This will largely depend on how well the company improves its net margins in the coming quarters.