Buy IVRCL; target of Rs 75: Motilal Oswal

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Buy IVRCL; target of Rs 75: Motilal Oswal

Motilal Oswal is bullish on IVRCL and has recommended buy rating on the stock with a target of Rs 75 in its August 16, 2011 research report.

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Motilal Oswal is bullish on IVRCL and has recommended buy rating on the stock with a target of Rs 75 in its August 16, 2011 research report.

"IVRCL's 1QFY12 performance was below expectations, impacted by poor execution and lower margins. Net profit declined 85% YoY to INR42m, lower than our estimate of INR188m. Revenue was up 1% YoY at INR11.2b, significantly below our estimate of INR12.6b, led by slow intake and poor execution. The company cited that there are serious issues with availability of bank credit to small subcontractors, which is adversely impacting the execution of large projects. This has led to a revenue slippage of INR1-2b for the quarter. Given the challenging macro environment, near-term headwinds remain."

"EBITDA margin contracted 167bp YoY to 7.4%, below our estimate of 9.2%. The erosion in EBITDA margin is attributable to increase in material costs, which constituted 37% of sales in 1QFY12, up from 32.6% in 1QFY11. Interest cost was INR628m v/s INR453m in 1QFY11 (up 39% YoY) and INR656m in 4QFY11. The increased interest cost was largely due to higher interest rates on short-term paper (up from 8-8.5% to 12.5-13% in the last six months). Debt as at end-1QFY12 stood at INR24b, up from INR21b in 4QFY11. Order intake during the quarter was INR9b. L1 orders were INR24b, including INR12b order for an underground mining project. IVRCL has cancelled a large overseas order of INR19b, received last year from Saudi Arabia, due to no progress on work. Of the INR216b order book, in-house BOT projects contribute INR45b and irrigation projects contribute INR41b (Andhra Pradesh irrigation projects at INR28b), where execution will be constrained in FY12."

"We are cutting our earnings estimates by 53% for FY12 and by 55% for FY13, largely due to continued execution concerns and higher interest expenses. We now model EPS of INR3.1 in FY12 (down 48%) and INR3.5 in FY13 (up 14%). We have cut our revenue estimates by 6% for FY12 and by 11% for FY13, and our EBITDA margin estimates by 148bp for FY12 to 8.1% and by 142bp for FY13 to 8.4%. The stock trades at 6.7x FY12E earnings, after adjusting for INR20 of value we have assigned to its subsidiaries - IVRCL Assets and Holding, and Hindustan Dorr Oliver (HDO). Maintain Buy, with a revised price target of INR75 (earlier INR93). Our SOTP-based target price comprises of core business at INR55/share (6x FY13E EV/EBITDA), IVRCL Assets at INR15/share, and HDO at INR4/share," says Motilal Oswal research report.

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To read the full report click on the attachment