Thursday, February 3, 2011

Stock focus: IVRCL

There is something horribly wrong with IVRCL. The stock is down 60% from its July peak and is clearly in a strong bear market. Now while this stock is not alone is the infrastructure mayhem, the following stats make you wonder if there is something specifically wrong with this Hyderabad based company, once among the bluest of blue chips in mid cap space

Consider this - Since July, the stock is down 60% in a period when it's peers are down anywhere between 25-35%. JP Associates is down 38%, GMR Infra is down 26%, IRB Infra is down 28%. So while the whole infra pack is under severe selling pressure, IVRCL in particular has been singled out for punishment

Let's talk about valuations in terms of Price to book. IRB Infra trades at 1.83x FY11 book value (even after the 28% fall), JP Associates trades at 1.74x and GVK at 1.32x. IVRCL on the other hand trades at 0.6x. Yes, half time books. Cheap no? Well even cheaper one would say if you look at the following stats

It holds 75% stake in the real estate company IVRCL Assets & Holdings (erstwhile IVR Prime). Now you give a discount of 80% in a bull market and 20% in a bear market. Let's assume we are somewhere in between. So I am giving 50% discount and this translates into per share value of Rs 15. It further holds 55% stake in another listed subsidiary Hind Dorr Oliver. Again, giving 50% discount, you get a per share value of Rs 8.

This leaves the core business being valued at Rs 50/sh. From all the brokerage reports that I could lay my hand on, this business has been valued at Rs 130-150/share. Then what really is the problem?

A cursory look at the balance sheet will give you the answers. The company has a market cap of Rs 2,050 crore and net debt of Rs 2,120 cr. Yes, the debt exceeds market cap of the company. In Q2 alone, it added debt of Rs 730 crores. It has just sought shareholder approval to hike borrowing limit by a further Rs 1000 crores. This is scary.

You wonder why the company is taking so much debt? Well, that's because it's not able to raise equity, either at parent level or at subsidiary level. It's been trying to do a QIP for IVRCL Assets with no success and has been looking for suitors for Hind Dorr, again with no success. The only silver line was the fact that it raises Rs 150 cr from a PE investor in IVRCL Assets in November at Rs 119/sh (The price now is Rs 55/sh, so my sympathies with this PE player).

But what else is bothering the investors. Couple of things - this whole quantum of debt is mainly due to higher loans to subsidiaries. Now the promoters may have great vision of value in their real estate business, but the investors don't share that view. Blue chip real estate stocks like DLF, HDIL, DB realty, HDIL are biting the dust. Who wants to invest in a real estate company based in Hyderabad?

And here is the scariest part for the promoters. They own less than 10% in this listed company with the public holding over 90%. Is the promoter in trouble? Well there are some rumours on the street, but I would not get into that

Conclusion: Promoters should respect shareholders, especially if the minority shareholders are actually holding majority stake. At some point, IVRCL will become a takeover candidate due to its solid underlying business and very low promoter stake. The stock may be oversold, but remember, a stock can remain oversold for months just like it can remain overbought for months

Disclaimer: The author of this article does not invest/trade in Stock markets including derivative markets


  1. Boils down again to governance issues. Regulators turn a blind eye while "promoters" holding a minority stake divert funds to Realty (Land Bank !)which is the most opaque bubble. Which PE fund ..trail may lead to interesting stuff ! Keep up the good work, Anuj !! -Sunil

  2. The stock may be oversold, but remember, a stock can remain oversold for months just like it can remain overbought for months
    --- Very well said