The Hyderabad-based IVRCL Group’s move to restructure its infrastructure business in two listed companies will unlock value for the flagship company, IVRCL Infrastructures Ltd. (IVR Infra). It will also clearly demarcate business operations into engineering, procurement and construction (EPC) and build-operate and transfer (BOT).
Two wholly owned subsidiaries of IVR Infra, which are primarily into BOT projects in roads and water supply, will be merged with another listed group company, IVR Prime Urban. All BOT projects will now be under the IVR Prime umbrella. For this, IVR Infra will get 59 million shares of the other company. The upshot: shares of both companies have rallied in the market, although IVR Prime nearly doubled from 1 October to close at around Rs 152 (11 November ) – see chart. At Rs 152, the deal value is around Rs 900 crore.
IVR Infra which is into large EPC projects has been gaining a foothold in BOT road and water projects through its subsidiaries. The company’s EPC business has been growing at 25-35% for the last five years. In future, though, the large BOT projects, being highly capital intensive with long gestation periods, might have strained cash flows. IVR Prime has a networth of around Rs 1100 crore, which would help bid for large BOT projects in future. The company could also sell off some of its land bank assets (3200 acres) to fund future projects with ease, besides being an attractive play for private equity players interested in the sector, or in specific projects.
Graphics: Sandeep Bhatnagar
On the other hand, the 59 million shares will increase IVR Infra’s stake from 62.4% to 80.5% in IVR Prime. So, going forward, IVR CL Infra will be able to raise money for BOT and other projects too by merely divesting this holding.
IVR Prime Urban was until now primarily into real estate and urban development. The company posted a net loss of Rs 12.2 crore during the first half of FY10. With a mere Rs60 lakh revenue, the company’s interest payable on the Rs 280 crore loan from IVR Infra impacted the bottom line. The merger would bring a turnaround for IVR Prime in the long run. It will now have access to toll revenues. Of the four BOT projects in its kitty now, three would be operational by January 2010.
Valuations of IVR Infra would be more attractive for those interested in the EPC business but were earlier shying away due to long payback period for BOT projects housed in the same company. For FY2009, the company had posted revenues of Rs 4882 crore registering a 33% growth over the previous year. Analysts are confident of a 25-30% growth during FY10. The merger therefore benefits both companies by bringing clarity in business operations.