Thursday, July 2, 2009


Stock run-up discounts in the strong growth potential

IVRCL reported a robust revenue growth of 33.0% yoy in FY09, closely in line with our estimates. However, EBITDA margin declined 121 bps yoy due to the losses incurred by the Company on the initial projects in the power T&D space. We believe that the stock run-up post elections factors in the significant growth opportunities that the Company can capitalise on. Hence, we recommend a Hold rating on the stock with a revised target price of Rs. 325.

Robust order book; water and irrigation segment remains the key driver: IVRCL continues to be one of the strongest companies in the construction & infrastructure space. The Company’s order book currently stands at Rs. 145 bn, which provides revenue visibility for 2.5–3 years. The water & irrigation segment accounts for ~65% of the order book, planned spending for which has doubled in the 11th Five Year plan period. Currently, around one-third of IVRCL’s orders in the segment come from Andhra Pradesh (AP); thus, with the Congress back in power in AP, the Company stands to gain from the state government’s continuing thrust on irrigation projects through its ‘Jalayagnam’ programme under which it plans to spend ~Rs. 180 bn p.a. for the next 4–5 years.

EBITDA margin likely to improve from the present levels: EBITDA margin declined by 121 bps yoy to 8.7% in FY09 primarily due to the execution of the low-margined power T&D projects in which IVRCL is seeking to gain prequalifications. However, as the proportion of such projects is likely to decline in FY10, the margin is expected to improve to 9.7%, close to the FY08 levels.

Fairly valued stock: We have revised our target price upwards to factor in the
improving fundamentals and the better-than-expected management guidance. Post the general election results in May 2009, IVRCL’s stock has surged 87% compared with a 17% increase in Sensex. We believe that the upside potential remains limited from the present levels. Hence, we recommend a Hold rating.