>IVRCL Infrastructure (MOTILAL OSWAL)

Healthy book to bill ratio of 3x FY09E, Andhra Pradesh accounts for ~38% of backlog: Current order book of IVRCL stands at Rs143b (+30%YoY, end Dec-08) implying a book to bill ratio of 3x FY09 revenues. IVRCL has one of the best pre-qualifications in the water and Irrigation segment evident from the fact that it bagged Rs16b projects from Rs40b project awards by Narmada Valley (Madhya Pradesh). But higher Andhra Pradesh exposure at ~38% of order backlog (and 60%+ of order intake during FY09) exposes IVRCL to possible execution/ project delay risks given elections in the state in April 2009. To mitigate higher receivable risk from Andhra Pradesh projects, it has increased sub-contracting (60% of projects).

No incremental equity funding requirement during FY09-FY11: For IVRCL, we expect revenue CAGR in FY09- 11 at 22%, vs 45% CAGR in FY06-09. This moderation, we believe would shorten the working capital cycle in turn improving the operating cash flows. Current (FY09E) net debt to equity ratio at 0.8x is comfortable, vs. peers. Outstanding equity contribution towards BOT projects is limited to Rs300m. Given that all BOT projects will be commissioned in FY10, possible monetization through stake sale / securitization could improve the cash flows. IVR Prime (62% subsidiary) is largely debt free, limiting further commitments by IVRCL.

Expect working capital improvement driven by lower inventory, improved terms with creditors: For IVRCL, working capital increased from 122 days in June 07 to 150 days in Dec 08, largely driven by increase in inventory (9 days) and decline in current liabilities (19 days). Going forward, we expect reduction in working capital to 130 days by FY11, driven by lower inventory and improved terms with creditors. Average borrowing cost currently stands at 11.75%, vs. peak rates of 12.5%. We expect interest costs as a percentage of revenues to decline from 2.8% in FY09 to 2.2% in FY11, leading to improvement in net profit margins.

Valuation and view: We have downgraded our earnings for FY09 and FY10 by 8% and 12.3% to factor in execution challenges, and lower margins due to increased sub-contracting and higher competitive intensity. We estimate earnings CAGR of 17.2%. Maintain Buy with a price target of Rs154/sh.

To see full report: IVRCL