IVRCL

IVRCL — (IVRCL.NS, I-OW; PT INR593)
Water projects dominate its order book; should benefit from irrigation opportunities
IVRCL has a predominant position in effluent treatment, water supply, sanitation and
irrigation-related projects. About half of its water-related order book is made up of irrigation
projects, with the Andhra Pradesh Irrigation Scheme being the key. At 58%, water projects
form a bulk of its order book of INR110 billion as of fiscal year 3Q08. We estimate strong
order inflows growth in this segment, given the high investment outlay in India’s irrigation
and water sectors for the next five years.
Other sectors to contribute as well
IVRCL has also expanded substantially into other segments such as power and roads and
buildings. Roads and buildings account for 11% and 21% of the order book, respectively,
while the transmission & distribution (T&D) segment accounting for 9% of the order book.
Robust investment planned in these three sectors over the next five years should help IVRCL
improve its order inflows.
Robust subsidiary businesses
! IVR Prime, the real estate subsidiary of IVRCL, currently has about a 85-million-squarefoot
area under development in seven different cities.
! The acquired Hindustan Dorr Oliver (HDO), which has engineering and design skills in
water projects, registered revenue CAGR of 40% during FY04-FY07.
! In the build-operate-transfer (BOT) space, IVRCL currently has three road projects and
one water desalination project. So far, the company has invested around INR2.6
billion as equity in these projects. It is the first company to develop a water
desalination project on a BOT basis.
We estimate strong growth in order inflows:
! We expect order inflows to register a CAGR of 31% during FY07-FY10. We expect
total order inflows over FY08-FY10 to be around INR259 billion versus INR113 billion
for the past three years.
! We project revenue CAGR of 41% over FY07-FY10.
! We estimate core EBITDA margins to expand from 10% in FY07 to 11.1% in FY10.
! We project an earnings CAGR of 40% over the next three years. Our EPS estimates
for FY08, FY09 and FY10 are INR13.9, INR20.8, and INR28.8, respectively.
India Infrastructure and Construction
March 25, 2008 5
! We estimate ROE to reach 12% in FY08 and 18% by FY10, up from 11% in FY07. If
we were to adjust for investments in subsidiaries, IVRCL’s ROE would expand from
13.6% in FY07 to about 20.6% by FY10.
! The total funds requirement by IVRCL over FY08-FY10 is close to INR16 billion
(including negative operating cash flows of INR11.5 billion). As the debt-equity ratio
of IVRCL is at 0.25x, we are building in a debt of INR15 billion over the next three
years to fund the capital requirement.
Initiate with a 1-Overweight rating and a 12-month price target of INR593
We value IVRCL using the sum-of-the-parts (SOTP) methodology. For its core construction
business, we value it at a P/E multiple of 17x on our FY09E earnings. We value IVR Prime
using the discounted cash flow (DCF) methodology. For its BOT portfolio, we value the
projects on respective P/B multiples.
Figure 1: IVRCL valuation
Segment March 2009 value (INR mn) Value per share INR Comment
Core construction business 53,783 399 17x on our FY09 earnings
IVR Prime 18,007 134 Valued on NPV basis
BOT Portfolio 5,657 42 Multiple to book
Hindustan Dorr Oliver 2,484 18 15x on our FY09 earnings
Total 79,931 593
Source: Lehman Brothers estimates
Based on our SOTP valuation, we have a 1-Overweight rating on IVRCL and a 12-month
price target of INR593, representing potential upside of 72% from the current levels.