Stock Market Result Update on IVRCL Infrastructure for 1QFY2012

Stock Market Result Update on IVRCL Infrastructure for 1QFY2012 with a Buy recommendation and a Target Price of `64 (12 months).

IVRCL Infrastructure (IVRCL) reported disappointing set of numbers for 1QFY2012, with lower-than-expected performance on all fronts despite our estimates being the lowest on street. We are revising our estimates downwards and have reduced our target P/E multiple to 7x from 8x to factor in poor performance in 1QFY2012, high interest rate scenario and persistent pessimism surrounding the sector. However, the recent sharp fall in IVRCL’s stock price has brought the stock at undemanding valuations of 0.5x P/BV on FY2013E (standalone). Hence, we maintain our Buy view on the stock.

Results disappoint, despite low expectations: IVRCL reported abysmal 1.6% yoy top-line growth to `1,124.3cr (`1,106.4cr), below our and street estimates. On the operating margin front, the company posted dismal margin of 7.6% (9.1%), a dip of 150bp yoy, against our estimate of 8.9% owing to commodity price pressures, high labour charges and ineligibility to pass on escalations in water projects (primarily in Tamil Nadu region). Further, IVRCL reported a shocking 85.0% yoy decline on the earnings front to `4.2cr (`28.1cr), against our estimate of `15.9cr and consensus estimate of `22.3cr. This was primarily on account of low margin and higher interest cost (`62.8cr).

Outlook and valuation: We have valued IVRCL on an SOTP basis. The company’s core construction business is valued at P/E of 7x FY2013E EPS of `6.3 (`44.2/share), whereas its stake in subsidiaries IVR Prime (`15.0/share) and Hindustan Dorr-Oliver (`4.5/share) has been valued on mcap basis, post assigning a 20% holding company discount. At the CMP of `40, the stock is trading at 6.3x FY2013E EPS and 0.5x FY2013E P/BV on a standalone basis and adjusting for its subsidiaries at 3.2x FY2013E EPS and 0.2x FY2013E P/BV. Therefore, on the back of the company’s robust order book-to-sales ratio (2.7x FY2011 revenue, adjusted for L1 and slow-moving orders) and attractive valuations, we maintain our Buy view on the stock with a target price of `64.