Thursday, April 04, 2013

IVRCL Ltd: Moving In The Right Direction
Sale of 3 road projects should ease liquidity concerns, but still needs to sell more assets to cut debt meaningfully
The stake sale in three build-operate-transfer (BOT) road projects has come as a relief for IVRCL, which had in the past seen significant downgrades due to delay in monetisation of assets and increasing liquidity issues. Post the announcement, its stock gained 2.8 per cent to close at Rs 22.35 on Tuesday.

Sale of the three road projects (one under construction and two completed) is expected to fetch the company about Rs 500-550 crore while resulting in a reduction in debt by about Rs 1,500 crore. Analysts believe, the inflow of Rs 500-550 crore works out to about 1.2 times the book value of equity invested in these projects (Rs 350 crore of equity and about Rs 100-120 crore accumulated loss), which is reasonable in the current environment.

What’s more, in the coming months, IVRCL plans to monetise another three BOT projects, which analysts believe will be positive. This will not only reduce the need for fresh funds, but will also lead to a decline in loans as the debt linked to these projects will be transferred to the buyer and hence, result in lower interest cost. Analysts believe this initiative is part of overall strategy to raise funds worth about Rs 1,000-1,500 crore from assets sale, and is in the right direction.
Lowering debt:
The company’s consolidated debt in FY12 stood at Rs 6,187 crore and it incurred interest cost of Rs 731 crore. Given that IVRCL earned profit before interest, depreciation and tax of Rs 785 crore, a large part of the profits were utilised to pay the interest cost. This along with lack of sufficient funds has led to execution challenges for IVRCL despite having a strong order book of about Rs 25,000 crore (over four times its revenue). "Since the past one year, it (IVRCL) was not able to get traction in execution due to higher working capital requirement, lower sub-contracting and high interest rates. We believe traction in execution would depend on monetisation of assets, improvement in the working capital cycle and a cut in interest rates,” said Amit Srivastava, research analyst at Nirmal Bang Equities.

Analysts believe that with the sale of BOT projects, overall debt should come down by about Rs 1,500 crore and if the company is able to sell three more BOT projects as planned, overall debt could come down by Rs 2,000-2,200 crore. Reduction in debt will lead to lower interest cost. Theoretically, even at 10 per cent rate of interest, it should lead to an Rs 200-220 crore decline in interest cost.

Besides, the equity capital invested by IVRCL in these projects will also be released, which it can use for working capital to expedite on-going projects. Additionally, analysts believe some of the funds will also come handy for meeting equity requirements (Rs 1,100-1,200 crore over three years) of existing projects. “Sale of assets is positive because that will help in lowering debt and interest cost. But the bigger challenge still remains in terms of managing working capital especially in the light of general elections next year,” says Manish Kumar, who tracks the company at SBICAP Securities.
Although liquidity will improve due to the asset sale, as Kumar says managing working capital will be a key challenge. Nevertheless, the reduction in debt should rub-off positively on the bottomline, which is a good sign considering that the Street was seeing a possibility of losses in FY14.

In this backdrop of low earnings visibility (at least for 18 months), valuing the company on the basis of assets is considered to be appropriate. Currently, IVRCL is trading at a market capitalisation of just Rs 668 crore, as against its networth of Rs 2,876 crore. Prior to the new deal and including debt, the company is valued at Rs 6,717 crore, which is less than two times its net current assets. But, if IVRCL is able to meaningfully cut debt and improve operational performance, things could be different.