In a recent move, IVRCL Infrastructures & Projects (IVRCL) has decided to transfer its BOT projects in the water and road segments to IVR Prime Urban Developers. The deal is seen as favourable for both the companies on various counts and will enhance clarity on the company’s business structure. Going ahead, the prospects of both companies look good. For IVRCL, given its strong order book position and huge investments planned towards infrastructure creation, its revenue visibility is stronger.
The deal
IVRCL is one of the leading players in the infrastructure space having presence in growing segments like water, irrigation and roads. IVRCL is merging its two wholly owned subsidiaries namely, IVR Strategic Resources & Services and IVRCL Water Infrastructures with IVR Prime (a listed real estate player). Both the 100 per cent subsidiaries own and operate nine BOT projects in the water and road segments; of this five projects are completed or nearing completion while four are in early stages of development. The total value of these assets is estimated at about Rs 938 crore, which looks fair at about 2.1 times the book value of equity investments (Rs 450 crore) in these projects.
Gains for IVRCL
The consolidation of all its BOT projects under one entity will provide clarity on the company’s business structure. It will also enable IVRCL to bid for larger projects as this deal will lead to an improvement in its debt-equity ratio and effective utilisation of shareholders’ funds. As a consideration for transfer of these businesses, IVRCL will get 5.95 crore shares in IVR Prime, which will increase its stake in IVR Prime to 80.5 per cent. Thus, it will continue to gain from the growth in the businesses of its subsidiaries.
| VALUE OF IVRCL STAKE | ||
| Pre merger | Post merger | |
| Outstandaing shares (in crore) | 6.4 | 12.4 |
| IVRCL Stake in IVR Prime (%) | 62.4 | 80.5 |
| No of shares held by IVRCL (in crore) | 4 | 9.95 |
| CMP of IVR Prime (Rs) | 158 | 158 |
| Value of IVRCL stake (Rs cr) | 631.9 | 1,562.30 |
| Value of IVRCL stake (Rs per share) | 117 | |
Better visibility for IVR Prime
IVR Prime covers all segments of real estate development including housing, commercial and retail. The company has a land bank of over 3,300 acres spread across cities like Hyderabad, Bangalore, Chennai, Vishakhapatnam, Pune, Noida and Nagpur. Despite its huge land bank across major cities, IVR Prime is not doing well primarily given the slowdown in the real estate market. During 2008-09, IVR Prime reported an 87 per cent decline in sales while net profits fell by 95 per cent.
| VALUATION OF BOT ASSETS | |
| Share issued by IVR Prime (in cr) | 5.9 |
| CMP of IVR Prime (in Rs) | 158.0 |
| Transaction value (Rs cr) | 938.5 |
| Invest. value of transferred BOT proj. (Rs cr) | 450.0 |
| P/BV (x) | 2.1 |
The situation was equally grim in the recent quarter ended September 2009, as the company reported revenues of mere Rs 34 lakh and a loss of Rs 6.1 crore. But now, the group wants to gradually depart from the real estate business and will possibly look for disposing off some of its assets (land bank) and use the funds for the infrastructure projects, which provide greater scope to grow given management’s experience and capabilities in this sector. Besides, it will offer relatively smoother revenue streams for the company, compared to the lumpy revenues in the real estate business.
Higher leveraging
While it has a large land bank, IVR Prime does not have any debt in its book and is sitting on a large net worth of Rs 1,093 crore (including minority shareholders). Analysts believe that most of IVR Prime’s assets are not utilised fully and this move could benefit the company. According to analysts’ estimates, post merger the company’s net worth will increase to almost Rs 2,000 crore, which can be further leveraged to raise funds (including debt) enabling IVR Prime to bid for larger BOT projects in the infrastructure space, especially the large PPP projects which are expected to come in the road segment.
Conclusion
Analysts believe that there would be more clarity now in terms of the structure of the business. IVRCL Infra will operate in the construction segment, whereas IVR Prime will own the various infrastructure assets in the BOT space. The deal is thus, considered to be a winning proposition for both the companies where the assets can be utilised to their optimum levels and focus can remain on the infrastructure space particularly the BOT projects, where the government is keen to encourage private participation.
| FINANCIALS | ||||
| in Rs crore | H1FY10 | H1FY09 | % change | FY10E |
| Net sales | 2,350 | 2,106 | 11.6 | 5,665 |
| EBIDTA | 224 | 191 | 17 | 545 |
| Net profit | 84 | 100 | -15.3 | 236 |
| EPS (Rs) | 6.3 | 7.5 | -15.5 | 17.5 |
| PE (x) | - | - | 22.1 | |
| Consolidated financials of IVRCL Infra Source: CapitaLine; E: analyst estimates | ||||
For IVRCL, it already has an order book of Rs 14,900 crore, which is over 3 times its 2008-09 revenues and provides enough visibility and growth. Analysts are positive on IVRCL, and they value the company between Rs 380-460 per share on the SOTP basis including the valuations of its listed subsidiary Hindustan Dorr Oliver, in which IVRCL holds a 52 per cent stake.
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