Robust order book (up 48.1% YoY) to drive earnings growth: IVRCL’s current order backlog stands at Rs120b (+48.1% YoY, 3.5x FY08E revenue), which will drive revenue and earnings CAGR of 40.4% and 36.6% during FY08-FY10. We expect EBITDA margins to improve 70bp over FY08-FY10 driven by i) increasing proportion of buildings and power transmission in the order book and ii) operating leverage. Share of transportation projects to order book has reduced from 22% in March 2007 to 12% as at December 2007, which again is positive for margins. Given that ~93% of order book has price variation clauses, the impact of raw material price increases is limited.
Establishing a strong position in power T&D, buildings: IVRCL has been successful in building a strong presence in the power T&D segment (FY08 revenues Rs6.5-7b, v/s Rs3.6b in FY07). Also, share of buildings in order book has increased to 21% in December 2007 (v/s 12% in December 2006), wherein margins are relatively better. Both these segments are expected to be key growth drivers. IVRCL is also the largest construction companies in India in the ‘water management’ segment (50% of FY08 revenues).
Robust FY09 guidance: IVRCL reiterated revenues of Rs46-49b (up 35%-44% YoY), EBIDTA margin of 10.6-10.8% (up ~50bp YoY) and PAT of Rs2.9-3b (up 38-43% YoY). The company has comfortable net DER of 0.6x (March 2008), while incremental equity commitments towards BOT projects are negligible.
Valuation and view: We expect IVRCL to report net profit of Rs2b in FY08 (up 44.4% YoY), Rs2.7b in FY09 (up 34.4% YoY) and Rs3.8b in FY10 (up 38.8% YoY). At the CMP of Rs380/share, the stock trades at reported PER of 23.5x FY08E, 17.9x FY09E and 12.9x FY10E. Adjusted for BOT, real estate etc. the stock is trading at PER of 17.3x FY08E, 13.2x FY09E and 9.5x FY10E.
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Independent power producer and infrastructure player Lanco Infratech is preparing to join the great-Indian solar rush with plans to set up an end-to-end solar complex in Chennai. The company is working on the final details and will announce everything in a few days. It will deal with the entire gamut of solar technologies including conventional crystalline and thin film technologies. This move is in line with Reliance Industries’ plan to set up a plant in Jamnagar at a cost Rs 11,631 crore to make polysilicon, single and multi-crystalline ingots, solar grade wafers, SPV modules. The 1 gigawatt capacity plant is expected to create jobs for 11,000 workers.
The Union government has already received seven proposals worth $16 billion for setting up manufacturing facilities for polysilicon, single and multi-crystalline ingots, wafers, solar cells, photovoltaic moduels, LCDs, systems-on-chip and IC assembly units. While Reliance Industries is going for the entire value chain, Videocon, MoserBaer PV Technologies, Titan Energy Systems, KSK Energy Venture and Signet Solar are setting up units to manufacture solar components.
The rush of proposals has come in the wake of the incentives package announced by the government late last year offering 20% of capital expenditure in the first 10 years for semiconductor projects in special economic zones (SEZs) and 25% of capital expenditure for non-SEZ units including financial subsidies and equity participation.
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In its first overseas acquisition, JK Tyre & Industries has bought the privately-held Mexican tyre company Tornel for Rs 270 crore. The buyout is expected to close by May end. Earlier, in 1997, JK Tyres had acquired 51% stake in the domestic tyre company, Vikrant Tyres.
This acquisition will take JK Tyres’ annual capacity to 153 lakh tyres, of which Tornel will contribute 66 lakh. This will also make JK Tyres the largest tyre manufacturer in India. The four plants of JK Tyres together have a combined production capacity of 650 metric tonnes a day, while Tornel’s three plants have a production capacity of 290 metric tonnes a day from its 2,000 employees. Tornel’s annual turnover is around Rs 800 crore ($202 million in 2007), while JK Tyres turnover was in excess of Rs 3,200 crore in the last fiscal, of which Rs 500 crore was from exports. Tornel will be a fully-owned subsidiary of JK Tyres. JK Tyres will raise the money through internal accruals and debt, which will be structured though a SPV. JK Tyre shall bring a rights issue in the next few months, which will be in the ratio of 3:1, to help bridge the funds for the acquisition. The price of the issue will be determined at the time of offer.
This 100% acquisition will allow JK Tyre to gain access to North American markets through a range of free trade agreements (FTAs) that Mexico has with these countries. The company plans to continue the Tornel brand in Mexico, Brazil and other American markets, which will co-exist with its own JK Tyres. It will also utilise Tornel’s 241 distributors and 282 sales outlets to distribute its own brand.
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The Index of Industrial Production (IIP) rose 8.6% in February 2008, with capital goods growth rebounding to double-digit levels after falling to an inexplicable low of 2.1% in January, and consumer durables climbing out of negative territory. This comes as good news, as the IIP growth rate had dipped to 5.8% in January from 7.7% in December. Industrial growth at 8.6% in February 2008 is still lower than the 11% achieved in February 2007.
Capital goods growth, which, by falling to 2.1% in January, 2007-08, is back in double digit at 10.4% in February 2007-08. However, it is lower than 18% witnessed in February 2006-07. The story in consumer durable sector, which includes automobile and white goods, has also bettered. From a negative 3.1% in January, the growth in consumer durables sector bounced back with 3.3% growth in February 2007-08, and is near double of 1.8% in February 2006-07. The consumer non-durable sector, comprising largely FMCG products, grew by a whopping 11% in February 2007-08 compared with 9.3% in the same month in 2006-07. The sector’s performance is expected to better with customs duty cuts in edible oils and excise duty cuts in the budget start playing on the demand.
Basic goods and intermediate goods grew by 7.3% (10.7%) and 8.2% (13.3%), respectively, in the month under consideration. Manufacturing, which occupies the highest weightage of about 80% in the Index of Industrial Production, grew at 8.6% against 12% in February, 2007, much higher than 5.9% in January. In February, electricity generation grew by 9.8% from a low of 3.3% a year-ago while mining output managed to maintain the growth rate of 7.5% in February 2007-08. Mining and electricity had dropped to 1.8% and 3.3% in January 2007-08. As many as 15 out of the 17 industry groups showed positive growth in February 2007-08.
The February number reaffirms the belief that India’s growth story is very much on track. Although growth is a tad lower compared with previous months due to high base effect, cumulative growth for the April-December period indicates that investment-led growth is very much intact.
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Lanco Infratech Ltd (LITL) has won two super critical power projects with an installed capacity of 3300 MW in Uttar Pradesh. The bids were called by the Uttar Pradesh Government for development of the two thermal power projects viz., Prayagraj of 1980 MW (3x660 MW) and Sangam of 1320 MW (2x660 MW). As per the terms of the bids, while 90% of power generated through the projects must be sold to the Government of Uttar Pradesh, the remaining 10% could be sold by the successful bidder through the merchant market.
LITL has won both the projects by outbidding other top players like Reliance Power, NTPC and Jindal Steel & Power. The projects include all the required infrastructure linkages like road, water, fuel and rail. From among the four leading business houses that participated in the bid for the Prayagraj Power Project, LITL won the bid with a quote of Rs 2.88 per unit. The second lowest bidder Reliance Power quoted Rs 2.94 per unit, followed by NTPC's Rs 3.44 and Jindal Steel & Power's Rs 3.591. The Sangam Power project had five players in the fray - LITL, Reliance Power, JSW, Jindal Steel & Power and RPG. Here also LITL won the bid through a quote of Rs 2.838 per unit while Reliance Power's was Rs 3.051, CESE's Rs 3.389, JSPL's Rs 3.51 and JSW's Rs 3.545.
LITL will invest around Rs 14,000 crore for developing the two projects in Uttar Pradesh. With the addition of these two projects, Lanco would now have a total capacity of around 13,000 MW, covering both operational and those under implementation and development.
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