As a solid play on the infrastructure theme — mostly Railways — IRCON International, a Government of India firm, has delivered on multiple fronts and established a healthy execution track record for itself. The company is an integrated engineering and construction player that operates in such segments as Railways, highways, electrical works and buildings.
Investors can subscribe to the initial public offering (IPO) of the company with a two to three-year perspective. The Centre is looking at divesting a 10 per cent stake in the firm.
A large order book, high-value contract wins, expertise in project management and execution, and a healthy mix of domestic and international revenues are positives for the company. IRCON is a net debt-free company with robust financials.
At the upper end of the price band (₹470-475), the company demands a fairly reasonable price-earnings multiple of less than 11 times its FY18 per share earnings. This is lower than the valuation of over 20 times at which the likes of NBCC and Engineers India trade, though these are not strictly comparable.
In FY18, IRCON’s revenues increased 27.6 per cent over the numbers recorded in FY17 to ₹4,212 crore, while net profit rose 7.2 per cent to ₹412 crore.
As the company has a solid cash position, the net debt-equity ratio has been zero or negative over the years. The EBITDA margin of the company has remained steady at around 11 per cent over the past three fiscals. IRCON’s revenues have grown at a compounded annual rate of 20.4 per cent over FY16-18.
As the company collects an advance payment before the commencement of most projects, the company does not face any working-capital crunch. CARE has given AAA rating for IRCON’s long-term credit facilities.
Driven by government orders
A chunk of IRCON’s business comes from the Railways. It receives contracts through tenders as well as by nomination from the Ministry of Railways.
The company is involved in such tasks as laying of tracks, railway electrification, signalling and telecommunication and gauge conversion. IRCON operates on fixed-price contract basis and bids for projects that are awarded on an item-rate mode.
As of FY18, about 86.7 per cent of its order book and nearly 69 per cent of revenues came from Railway projects. The dependence on the Railways has been declining over the past few years, with the company focussing on other segments such as highways and electrification.
As of March 2018, the company’s order book stood at ₹22,407 crore; this is equivalent to 5.3 times IRCON’s FY18 revenues, thus giving the business considerable visibility.
According to budget documents and data from CRISIL, investments in the Railways have more than doubled over the last five years to ₹120,000 crore in FY18. Spends are set to increase to average ₹170,000 crore over FY19-22, thus presenting considerable opportunities to an entrenched player such as IRCON.
The Railways has a mission of electrifying 24,400 km of tracks by 2020-21, which gives considerable scope for the company to bid and win contracts. Other potential areas are the Centre’s projects such as high-speed rail and dedicated freight corridors.
International diversification
Apart from strong domestic operations, IRCON has a fairly significant international presence. The company derived nearly 15 per cent of its FY18 revenues from overseas locations. It has operated in over 24 countries and has been involved in 127 projects across varied geographies. Currently, it has contracts in Malaysia, Sri Lanka, Algeria and Bangladesh.
The company constructed a dual gauge railway track on concrete sleepers in Bangladesh and an elevated rail track in Malaysia. IRCON has been involved in major road projects in Bangladesh and Nepal. It has also executed Railway contracts in Iraq and Algeria.
On the domestic front, IRCON has had a steady flow of large-sized projects over the years. As of March 2018, the company had as many as 20 contracts that are individually valued in excess of ₹500 crore. Clearly, the company has demonstrated the ability to win high-value projects.
The company is also into upgrading and rehabilitating of existing lines, including doubling, tripling and gauge conversion.
As the company almost entirely depends on government contracts, any adverse change in policies towards awarding projects or delays in executing new deals would hurt the company’s financials.
The issue is an offer-for-sale. The Centre hopes to raise about ₹470 crore from the IPO.