Q1FY2008 Result Update

IVRCL has reported a robust 59% growth in top line and 75% growth in reported profit after tax. The impressive growth was backed by robust order backlog accumulated in the last year (Rs 70 billion). We expect the company to report a CAGR of 32% in revenues and 31% in profits during FY2007-09E. Q1FY2008

Numbers reflecting robust growth

For Q1FY2008, IVRCL posted revenues of Rs 6.7 billion as against Rs 4.2 billion registering a growth of 59% YoY. The company has been experiencing a robust sales growth on account of additions in the order book especially in water/irrigation and transmission & distribution segment. The margins registered an expansion of 48bps on account of execution of transmission and distribution projects.

The company posted a growth of 75% in net profits from Rs 217 million in Q1FY2007 to Rs 380 million in Q1FY2008. Interest cost fell due to infusion of funds by QIP of Rs 5.5 billion. Company has provided for tax according to 23% and not 33.5% as the matter is under dispute and the company believes that its claims are tenable. According to 33.5% tax rate profit would stand at Rs 324 million still registering a growth of 49% YoY.

The company is having a robust order backlog of Rs 95 billion having an average execution period of 3 years. The order book is 2.5x its FY2007 revenues. The order book is fairly divided into road, irrigation, T&D and Building segments providing a good diversification. The company has 4 BOT projects for which the construction has commenced. The work on all road projects is expected to get completed by two-three years. The company has also achieved financial closure of its Chennai Desalination project.

IVRCL’s subsidiary Hindustan Dorr-Oliver (HDO) has a order book of Rs 4.5 billion (Q407 order Rs 3 billion) having an average execution of 15 months. The company is catching up in terms of order intake.

On real estate front IVRCL’s real estate entity IVR Prime hit the markets with IPO (July 2007) at a price of Rs 550. We expect that the development of IVR Prime properties will come back to IVRCL.

The company is setting up a transmission line manufacturing capacity which will be operational by April 2008. The initial capacity is capped at 2400 tonnes and the unit will act more as a captive facility. The company is setting up this facility as it is one of the criteria to bid for fabrication/installation of transmission lines.

The company also intends to act as a contactor to mining companies. IVRCL also has plans to execute orders in oil & gas pipeline segment as it resembles the technique of laying water pipelines (where IVRCL specializes).

Estimates

The company is sitting on a robust order book of Rs 95 billion with a 36 month execution period. We expect IVRCL to post a 45% growth in sales in FY2008E to Rs 31 billion and Rs 41 billion in FY2009E (32% growth YoY). Water segment will still dominate the revenue composition followed by roads segment. We expect the margins to expand by 17bps in FY2008E to 10.16% and further by 41bps in FY2009E to 10.5%. We expect IVRCL to post a net profit of Rs 1.7 billion in FY2008E and Rs 2.3 billion in FY2009E, registering a growth of 24% YoY and 37% YoY respectively. However, due to an increase in the capex and debt the net profit margins will be 5.5% for FY2008E and 5.7% in FY2009E. We expect IVRCL to post an EPS of Rs 12.9 in FY2008E and Rs 17.7 in FY2009E. We arrive at a price target of Rs 248 (14xFY09EPS) for the core business.

We have revised our numbers for HDO as it has started to get good order flow. We expect HDO to report turnover of Rs 3.3 billion in FY2008E and a net profit of Rs 253 million. We upgrade our EPS for FY2008E to Rs 5.6 (earlier Rs 4.6) and arrive a target price of Rs 17. Our earlier projection did not include Chennai desalination project (as financial closure was not achieved). For BOT projects we arrive at a revised price target of Rs 25 on P/BV basis. We value IVRCL’s diluted 62% stake (post IPO) in IVR Prime at 50% discount to price fixed at Rs 550 and arrive at a value of Rs 170 per share.

Valuation

IVRCL is having a diversified presence in cash contract projects, a decent BOT portfolio in hand. Coupled with this it has a subsidiary having expertise in niche areas. The company has added Rs 30 billion worth of orders in the Q1FY2008. At the CMP of Rs 380, the stock trades at discount of 29.4x FY2008E EPS of Rs 12.9 and 21.5x FY2009E EPS of Rs 17.7. We believe the stock is attractively priced compared to its peers. We recommend Buy on the stock with a revised 12-month SOTP target price of Rs 460 which translates into annualized returns of 21%.