IVRCL Infrastructures: Buy

Investors with a 2-3 year perspective can consider buying into the stock of IVRCL Infrastructures and Projects (IVRCL).

The company has managed to sustain the pace of order flows in 2007-08 — a relatively tough year which saw a slowdown in the order flows for a number of infrastructure and engineering companies.

Healthy growth in the order book combined with the company's strength in irrigation and water projects — a segment that has received significant attention in the Government's Budget and five-year plans — are likely to augur well for the company's earnings growth.

Given the current turbulence in the markets, investors can consider accumulating the stock in tranches, on declines linked to the broad markets. At the current market price, the stock trades at 12.5 times the company's estimated (standalone) earnings for 2009-10. It trades at about 11 times its 2007-08 consolidated earnings.

While the contribution from subsidiaries may be significant over the long term, we would now prefer to evaluate the company on the basis of its core business of infrastructure.

In 2007-08, IVRCL's order intake more than doubled, resulting in the order book expanding to Rs 12,800 crore.

Sub-contracting

IVRCL has been trying to overcome this issue through increased sub-contracting activity. While this strategy has resulted in robust growth in the topline, it has also contributed to a slight moderation in operating profit margin This strategy may, however, be inevitable in a sector where growth is mainly driven by volumes.

While IVRCL has continued to capitalise on its key strengths of irrigation and water-related projects, there has been a visible increase in building projects (24 per cent of order book), coming at the cost of road projects. We view this as a positive as building projects not only carries better returns, but holds lower risk.

IVRCL's diversification into water-related projects has been significant after its majority stake acquisition in Hindustan Dorr Oliver. This subsidiary's specialised skill sets in water treatment and processing equipment, together with IVRCL's bidding capabilities, had helped it tap a niche in this field. This segment could be a key long-term growth driver for the company.

Increase in commodity prices (despite escalation clauses on contracts) and execution challenges faced by its realty subsidiary remain key risks over the medium term