IVRCL Infrastructures: BUY


Investors with at least a two-year horizon can consider exposure to the stock of IVRCL Infrastructures & Projects. Accelerated growth in revenues on the back of faster execution of projects, strong order book and the expanding Government outlay towards water and irrigation projects augur well for the company's earnings growth over the next few years. At the current market price, the stock trades at 19 times its expected standalone earnings for FY 2009 and 15 times its consolidated earnings for the same period. We expect the company's subsidiaries in real estate (IVR Prime Urban) and water engineering solutions (Hindustan Dorr Oliver) to make a significant contribution in future.

IVRCL's sales for the quarter-ended December grew 87 per cent over last year with a comfortable pace of project execution. This is superior to the growth numbers recorded by the company's peers. Order book at Rs 10,230 crore also surged compared to the previous year. The average execution cycle time has so far been 2.5 years.

Water and irrigation projects account for 58 per cent of the above order book. While IVRCL has made considerable progress in the road and building segments, the irrigation and water segment continues to be the key revenue driver and propeller of profit margins. That the Jawaharlal Nehru Urban Renewal Mission has set aside 70 per cent of its outlay to this segment reflects its rising importance. IVRCL's execution skills in this segment have been bolstered by its acquisition of Hindustan Dorr Oliver – a water engineering solutions provider.

In the irrigation space, the company has so far derived a majority of its revenues from Andhra Pradesh, which has among the highest outlays for irrigation. However, with the spending from this State likely to taper off this year, IVRCL may see a lull in this segment, unless States such as Maharashtra, Gujarat and Karnataka ramp up their outlays. Apart from three BOT projects in roads through special vehicles, it has also entered the power transmission and distribution business. Regular building contracts also account for a healthy 21 per cent of the order book. In order to mitigate the risk of raw material hikes, the company has also undertaken orders where the client would supply raw materials. IVRCL's promoter holding has remained low for long. The high foreign institutional holding remains a risk, leaving the stock vulnerable to any significant phase of profit booking by FIIs, prompted by macro cues.