IRCON International - IPO - Healthy Prospects & Attractive Valuation

Ircon International Limited, formerly Indian Railway Construction Company Limited (IRCON), is an engineering and construction, specialized in transport infrastructure. Incorporated in 1976, IRCON International Limited (IRCON) is four-decade old government company (under the ministry of railways). It is engaged in the business of engineering and construction mainly specializing in major projects including railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV substations, electrical and mechanical works, commercial and residential properties, development of industrial areas and other infrastructure activities. IRCON provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects. In 2016, IRCON was ranked 248 in the list of the top 250 international contractors by Engineering News Record (ENR) of the United States. Presently it has 26 project offices and five regional offices to support and manage its business operations throughout India and five overseas project offices in Sri Lanka, Bangladesh, Malaysia, South Africa, and Algeria to provide onsite support overseas.

IRCON International (IRCON) – a Mini Ratna company incorporated by the Ministry of Railways – operates in the entire spectrum of infra services including railways, highways, electrical, metro and buildings etc. It provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects and also undertakes projects on BOT model. It has been demonstrating superb execution over last four decades and current order book at Rs224bn provides healthy visibility, going forward.

As per the Govts divestment target of Rs800bn in FY19, IRCON is divesting ~10% stake by offering 9.9mn shares via Offer for Sale (OFS) at a price band of Rs470-475 to raise Rs44.7bn at the upper end of the band. Consolidated PAT of Rs4.1bn for FY18 translates into an attractive PE of 10.9x.
There has been a steep price correction in listed infrastructure companies over last 3-4 months on the back of prevailing concerns over the reversal of interest rates, persistent delay in land acquisition despite higher compensation and funding constraints. We believe price offering by IRCON factors in all. Further, IRCON appears to be insulated with a higher interest rate scenario with no leverage.

Key Investment Arguments

•    Superior Execution & Diversification  Advantage
•     Healthy Growth Visibility on Robust Order Book
•     Light Working Capital Entails Healthy Cash Generation
•     Likely Expansion in RoE

    Key Risks

•    Adverse Change in Policies relating to Railways Investment
•    Execution Delay
•    Substantial Rise in Input Cost & Other Overheads

Outlook & Valuation
IRCON's earnings (Rs4.1bn PAT in FY18 vs. Rs5.6bn in FY15) have not witnessed any growth in last 3 years despite witnessing consistent growth in order book mainly led by margin contraction and shrinkage in overseas revenue.

However, it has maintained a healthy dividend payout ratio (>45%) over the years, as it pays out either 30% of PAT or 5% of Net Worth (whichever is higher) as dividend.

Further, considering healthy returns generated by NBCC and RITES (which are broadly infrastructure space being government companies), we feel IRCON's valuation at 10.9x FY18 earnings looks attractive and may not disappoint the investors.

Hence, we recommend SUBSCRIBE to the Issue.

Next read : If HPCL Is A Good Stock To Bet On?

If HPCL Is A Good Stock To Bet On?

 It's never a good idea to recommend an oil marketing stock, when crude prices are climbing. However, diesel and petrol prices are now aligned to market rates, which does not impact stocks like HPCL too much. Of course, if the government asks oil marketing companies like HPCL, BPCL or Indian Oil to absorb the crude hike, our recommendation could go haywire. Assuming that it does not, the shares of Hindustan Petroleum are an excellent bet at the current prices. The shares are now at a 52-week low of Rs 252.20, which makes the shares attractive. 

Solid growth

The company over the last five years has seen its net profits surge from Rs 1,100 crores in FY 2014 to Rs 7,128 crores in FY 2018. Last year the company rewarded shareholders with a solid bonus of 1:2 and dividends, which takes the dividend yield to as high as 8 per cent. HPCL has the second largest pipleline in the country and is the largest lube manufacturer. There are reports that HPCL may takeover MRPL, which if it happens, will make the company the second largest refiner after IOC. 

Solid expansion plans 

HPCL has lined-up some massive expansion plans to spend around Rs 75,000 crores over the next 5 years. This would include capacity addition at Mumbai and Vizag, expansion of gas pipeline network and a 5 mmtpa liquified natural gas regasification terminal coming up at the Chhara port in Gujarat. The company has also been rewarding shareholders with solid dividends and bonus issue in the past few years and there is reason to believe that the same would continue.

Concerns 

There are concerns, that rising crude prices, pose a threat. At the moment, petrol and diesel prices are de-regulated, which deflects any concern, but, if the government intervenes, than it could pose a problem. There are also worries that electric vehicles, may lower the demand for petrol and diesel vehicles. At least for the next 5-10 years, we see little room for worry, with petrol and diesel vehicles likely to continue to grow at a franctic pace, given how expensive electric vehicles are.

Valuations 

 HPCL is also very cheap on valuations. The stock at Rs 255, is trading at just 5.4 times, the 2018 EPS of 47.2. This is really low for a company that has a solid retail network. The HPCL stock is a good bet at the current market price of Rs 255. Investors may buy and hold the shares for the long term.

Next Read : How to pick a company strong on ethics and corporate governance
Previous Read : IRCON International - IPO

How to pick a company strong on ethics and corporate governance

Veteran investment adviser and writer R Balakrishnan shares some interesting pointers in a concise format.

Management quality is a function of ethics and governance. Someone asked me how important are these two attributes?

If we go by ‘equity research’ reports, it has absolutely no importance. No report comments on the quality of the management, preferring to be diplomatic or practical, since most sell side firms need some business in banking or equities to come their way. 

Equity research as a function has never made money on its own. It is like the appendix in the human body. Of course, it comes in to play when we want to acquire a company or take a significant stake in a company. Then we will all perhaps spend a lot of time figuring out who the owner is and what are his strengths and weaknesses. 

Sometimes, I see large institutional investors taking significant stakes in companies where the management quality is known to be suspect. I can only infer that it is perhaps a reflection on the quality of the investor also. Institutional investors are managed by people who get salaries and bonuses and they are not investing their own money. 

Most of us seem to think that it will not impact the investment. We think that by the time the bad qualities come to the fore, we would have cashed out our gains. Or we think that with so many other investors, we are not alone. We always seek for this comfort that we are not alone.

Governance and ethics of the highest standards are something that exist only in seminars and books. When it comes to money, there are shades of grey everywhere. The one thing working in favour of the investors is that most often, the businessman is also interested in maintaining a perennially north bound share price and hence our interests are aligned.

In the old days, when salaries of directors were restricted to a few thousands, there we no ESOPs or ‘preferential allotments’ or ‘warrants’, the story was different.

Also, the interest rates used to be high and our markets were small. Stocks never got such fancy valuations as what exist today. So, the promoter found it useful to take money away and leave just enough for the shareholders.

Today, with the fancy valuations the stock markets give, the promoter finds that keeping a rupee inside the company adds substantially to his wealth. And the promoter can take his multi-crore salaries, dilute when the price is right, issue warrants to himself when the timing is good etc.
There are so many indulgences that have become legal now.

Thus, the promoter has less reasons to skim off. A higher EPS translates in to significant wealth, given the benevolent secondary markets. Of course, no one is immune to a structured fraud. That can happen to catch the best of investors unaware.

Satyam Computers was one. Of course, the investors got lucky there since there was a motivated attempt to rescue the company in order to bail out a select few. However, I do not see the same things happening in a Gitanjali Gems.

However, there are ways to stay safe: Avoid companies with high debt, unusual amounts of cash in hand combined with low dividend payouts, continuous raising of capital, constant mergers and acquisitions, having hundreds of subsidiaries, having too many ‘associate companies’ (associate companies are where there is no disclosure, since there are external persons who are co-owners) etc.

Avoid in general companies where ‘revenues’ are based on some funny accounting or on ‘certification’ by management rather than plainly visible ones. Have a look at the schedule of Fixed Assets (nowadays referred to as ‘non-current assets) and look at what is happening there.

 Is there too much of fictitious assets like Goodwill? Is too much invested in real estate? Too much goodwill? All of these are just warning signs and call for deeper probe rather than just ignoring or accepting.

 Many edifices are built of papier-mâché. Kicking the tyres by going through the schedules of accounts for a few years will be a good habit to keep. Other thing that has helped me is to have a binary classification for valuation- companies that have brands or consumer products to be valued on basis of revenue. Companies that deal in commodities etc to be valued by Balance Sheet.

In essence, I find out what the company can make and how much of assets are needed. Then compare it with the “ENTERPRISE VALUE” (enterprise value is the sum of market capitalization PLUS debt). That helps me to buy when the industry is doing badly and sell when it is doing well.
Of course, the approach is simplistic, but a great starting point. Management integrity always pays off handsomely over time.

If you are taking chances, taking it knowingly. And be prepared for surprises. There is no early warning signal as to when a fraud will be exposed.

 P.S: A good analyst can always smell the cockroaches. No investor has the patience to listen to someone ranting about it.

This post initially appeared in Bala's blog

Next Read : IIFL Holdings to demerge Capital Wealth business

IIFL Holdings to demerge capital, wealth, finance business

Financial services firm IIFL Holdings will demerge its finance, wealth and capital business into three separate entities and list them on bourses in a year, a top official of the company, backed by Canada-based Fairfax Financial Holdings, said.

This is part of the company's strategy to reorganise the corporate structure in a changing business environment as organisation now sharply focus on their expertise in niche verticals, IIFL Holdings Founder and Chairman Nirmal Jain said.

The demerger, followed by listing will involve three units -- IIFL Finance (loans and mortgages); IIFL Wealth (wealth and asset management) and IIFL Securities (capital markets). 

"World over, investors and regulators are favouring corporate structures to change from control-oriented close- knit conglomerates to innovation and idea-driven independent enterprises. Incumbent players are being challenged by new entrants like never before. 


"The reorganisation will prepare IIFL group companies for the growth opportunities amidst intensifying competition in coming decade," Jain told PTI. 

Each company, when listed separately can attract and motivate its key people with stock options, Jain said, adding a clean corporate structure with no cross holdings will ensure transparency, highest governance standards and compliance. 


"By separating them, we will allow them to grow to their full potential," he added. 

Fairfax will be the "most significant" non-promoter shareholder in all the three companies, he said. 

"The reorganisation process requires multiple approvals and can take 10-12 months. However, the scheme will be effective from the appointed date," Jain said further. 
As per the existing shareholding structure, promoters have 28.9 per cent stake in IIFL Holdings, Fairfax holds 35.3 per cent, company's employees 4.4 per cent while others have the remaining 31.4 per cent. 

Post demerger, the proposed shareholding of IIFL Finance will result into 23.4 per cent stake by promoters, employees 7.7 per cent, others 25.5 per cent, Fairfax 28.6 per cent and CDC Group 14.8 per cent. 
IIFL Wealth will have promoters' stake of 15.7 per cent; employees 26.7 per cent; others 17 per cent, Fairfax 19.2 per cent and General Atlantic 21.4 per cent. 

In IIFL Securities, promoters will hold 28.9 per cent; Fairfax 35.3 per cent; employees 4.4 per cent and others 31.4 per cent. 

Currently, IIFL Holdings' loans and mortgages business has an asset under management of Rs 27,288 crore; wealth and asset management unit manages over Rs 1.28 lakh crore from over 10,000 high networth families and while the capital market business has 40 lakh customers serviced from more than 1,200 locations. 

The reorganisation will result in an equity shareholding mix where the owner of seven shares of IIFL Holdings will get seven shares of IIFL Finance, seven shares of IIFL Securities and one share of IIFL Wealth. 

IIFL Holdings has registered an increase of 32 per cent in its consolidated net profit at Rs 235.76 crore in third quarter ended December of this fiscal, against Rs 179.07 crore in the same period a year earlier.