IVRCL Ltd’s June quarter performance is not exactly comparable with the year-ago period due to a restructuring exercise among group companies. The group’s real estate business and build-operate-transfer (BOT) projects were acquired by IVRCL in exchange for equity in the company.

photoHowever, following the merger and the resultant synergies, operating margins improved to 10.3% in the June quarter. This was on a mere 7.4% growth in net revenue from the year-ago quarter. Earlier the profits from engineering, procurement and construction business were booked partially between IVRCL and its subsidiary, which was a separate entity.

What sticks out like a sore thumb in spite of the merger is the debt-equity ratio of 1:3, with a debt of Rs2,500 crore. High interest cost consistently has strangulated the company in the last several quarters, stalling quicker project execution, too. For instance, the June quarter’s finance charges totaled Rs137.6 crore, higher than the operating profit of Rs124.1 crore. The firm posted a net loss of Rs6 crore during the quarter.

Meanwhile, IVRCL’s humungous order book of Rs25,000 crore requires funds, too. Around Rs2,000 crore is needed towards equity infusion in the next three to four years. According to a report by Kotak Institutional Equities Research, the firm plans to raise around Rs900 crore through compulsory convertible debentures in the near term. Still, it would have to raise the balance through internal accruals or asset sales.

Towards this end, and to reduce debt on its books, IVRCL has been striving to sell land parcels and some of its BOT road assets. Further, companies cannot delay the financial closure of projects awarded to them, hence the need for funds to infuse equity is imperative. IVRCL recently divested 51% stake in one road project, even as negotiations for three more are underway. “Monetization of BoT asset would help in resolving the funding needs, which will give better execution visibility to the transportation order book that stands at Rs9,200 crore as on June 2012," says a report by Emkay Global Financial Services Ltd.

Debt on books is, therefore, the company’s biggest impediment to earnings ramp-up. Addressing this problem could see greater momentum in project execution and earnings, which historically was IVRCL’s strength. IVRCL’s stock has been beaten down like the rest of its peers in the infrastructure universe over the last 18 months. Analysts are of the view that at the current price of around Rs37 apiece, there is limited downside. Yet, improved cash flow and lower interest cost hold the key to any upsides.

Also See

Improved margins (PDF)

Intraday & quarterly performance (PDF)

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