>IVRCL INFRASTRUCTURES & PROJECTS LIMITED (MORGAN STANLEY)

Revenue Growth Disappoints but Margins Surprise

Quick Comment: We do not read too much into the slower revenue growth. IVRCL reported F1Q10 revenues of Rs 10.5 bn and profit before tax of 516 mn; 7% and 6% below our estimates, respectively. We do not read too much into the slower revenue growth for F1Q10 as the first quarter is usually the smallest quarter and may not be indicative of the full year. We believe that payments to contractors by the state government were delayed because of the recently concluded elections in Andhra Pradesh and this led to the slower revenue growth this quarter. Given the strong order book position of Rs 149 bn (3x TTM revenue), we expect
the company to make up the revenue in the next 3 quarters and deliver on our numbers for the full year.

Best first-quarter margins in five years: The key positive for us from the results is that IVRCL managed to expand its margins by 50 bps to 9.2% in F1Q10 (Exhibit 4). Even though these margins were on the back of slower revenue growth, the company expects to clock
9.5-10% margins for the full year. As revenues and operating margins pick up over the remaining quarters and below the line items (interest and depreciation) remain similar in size, we would expect operating leverage to kick in, with net profit growth accelerating.

PAT not comparable due to change in tax accounting: Though IVRCL is still contesting the 80IA issue with the tax authorities due to the retrospective amendment introduced in the Finance Bill, 2009, the company has not claimed any deduction in the current quarter. Hence, we would focus on the PBT decline of 3% rather than the PAT decline of 17% YoY, which is not comparable YoY basis.

To see full report: IVRCL