Hold IVRCL Infra, target price Rs 25: Edelweiss

[Editor: I had earlier asked all to buy IVRCL Ltd (Rs.18.20) on all declines and keep holding for a target of Rs.31-32. But some traders started selling the scrip, post Q1FY15 results, like mad fellows. It is these people I know will not make much money from the markets. The pont is that if you go on buying and selling continuously (at the fall of a hat), then it is only the Brokerage House/s which gain/s and not you. Stick to few companies and track them on regular basis, to make money from the markets. Don't apply strict stop losses in a  bull market, because a scrip could suddenly rebound, taking all of you by surprise. Many traders I know sell a scrip with the hope of buying that at a lesser price---but unfortunately that does not happen all the time and they are left crying as the scrip suddenly starts hitting the UCs]

Photo: IVRCL Ltd

Edelweiss Securities has given a hold recommendation on IVRCL Infrastructure with a target price of Rs 25.

In a note to clients, the brokerage said IVRCL Infra (IVRCL) reported loss of INR1.6bn (versus estimate of INR812mn loss) in Q1FY15 as falling sales and INR290mn provisioning for bad debts took their toll. Operating de-leverage led to fall in margins which along with surge in interest costs resulted in the large loss for the quarter. 

“Early conclusion of the sale of BOT assets and the CDR* process (currently under way) could provide relief on the funding front (which will help execution) and interest cost. Owing to higher-than-expected losses, we lower our target price to Rs 25 (Rs 28 earlier). We maintain a ‘hold’ rating on the stock,” the brokerage said.

Revenues came in at INR8.3bn (down 17% YoY) as working capital crunch forced the company to slow down execution. This impacted operating margins, which at 1.6% fell by 300bps YoY and 280bps QoQ. The company’s debt remained high at ~INR39bn, which meant that interest costs at INR1.6bn rose 25% YoY despite sluggish top line. As a result, the company posted INR1.6bn loss in the quarter.

During the quarter, the company received approval for its CDR process. The same is currently underway and its implementation will provide the much needed working capital funding post which the company should witness traction in execution. Similarly, it expects the sale of its three BOT projects to get concluded over the next few months which should also ease its fund constraints (can provide ~INR4bn funds). The company also plans to raise funds through a rights issue, which should further alleviate its financial stress.

IVRCL’s return to profitability depends on early resolution of its balance sheet issues, which is the key to get execution back on track. Till such time, revenues will remain muted and profitability will be under pressure. “We revise our target price to INR25 —INR13/share from EPC business (valued at one-year forward price/book multiple of 0.5x), INR11 from BOT projects (DCF valuation) and INR1 from Hindustan Dorr Oliver (market cap basis). We believe the stock will trade at a discount to fair value till concerns on a leveraged balance sheet and profitability get resolved. We maintain hold rating on the stock,” the brokerage said.