Order book, execution cap downsides for IVRCL Infra

Order book, execution cap downsides for IVRCL Infra

Against the backdrop of a worrisome performance in the September quarter, IVRCL Infrastructures and Projects Ltd showed improved execution and operating profits in the December quarter. Net revenue rose 20% year-on-year (y-o-y) to 1,410 crore, also higher by 32% quarter-on-quarter (q-o-q), which, however, was a weak quarter as monsoon affected execution. Interestingly, higher revenue generation appears to have offset costs, as total expenditure is flattish at 90% on a y-o-y basis. In fact, it is lower than the preceding period.

Given this, operating profit during the quarter grew 21% y-o-y and 43% q-o-q to about 140 crore. Operating profit margin, which had dropped during the preceding quarter to 8.9% rose to 9.9%, in line with the year-ago period. Employee costs, and construction and masonry expenses together were flat on a y-o-y basis.

What hit profits was the interest cost, which has been a drain on the firm in the last three quarters. Net debt at the end of the December quarter was 2,200 crore. Receivables from government clients, mainly in Andhra Pradesh, remain high, resulting in an increase in need for working capital. Compounding this is the rise in interest rates in the last two quarters. Consequently, interest costs jumped about 61% y-o-y and 23% q-o-q to 59.2 crore.

Also See | Debt burden (PDF)

The mid-cap stock has so far lost ground mainly because growth in revenue does not trickle down to net profit. Shares have plunged 57% since April, underperforming the CNX mid-cap index. But following the announcement of a better operating performance in the December quarter, shares rose 7% to 71. This is despite IVRCL’s stand-alone net profit of 42.3 crore being lower than the year-ago period by 8%. Perhaps what improved sentiment was that on a q-o-q basis, profit rose 82%. Also, among mid-cap construction firms, IVRCL has a robust order book of 24,200 crore, nearly four times its fiscal 2011 estimated revenue.

Most analysts have revised the estimated stand-alone revenue for the year downwards, from 6,500 crore to around 6,000 crore for fiscal 2011. Interest costs will continue to eat into profitability of the stand-alone entity in the near term. How it funds the existing orders and maintains the pace of execution will determine earnings growth. A strong order book, and its credibility in winning new orders and execution will, therefore, limit downsides in IVRCL’s share price.

Graphic by Ahmed Raza Khan/Mint