In 1991, the government of India was at the precipice of an Economic Crisis. It had been consistently spending more than it could make and was on the verge of bankruptcy. In a bid to boost its revenues, the government initiated the process of disinvestment — raising money by selling part ownership in the many public sector companies that the government owned and the disinvestment of IRCON International follows this rich tradition and so, we have a new IPO.
While the general perception of Sarkaari companies is that they are loss making, IRCON isn’t quite there yet. It is a leading turnkey construction company in the public sector classified as a Miniratna-1.
What is a Miniratna- 1 Category?
Imagine you were a public sector company under the Central Government and made continuous profits during the past three years. While in your quest to be profitable, imagine you also maintained a positive net worth and refused to depend on budgetary support from the government. Imagine that you worked with integrity and never defaulted on repayments of interests/loans. you would then be called a Miniratna. To top it all off if you show profits of Rs. 30 crore or more in any one of the three preceding years you would be a Miniratna (Category — I).
IRCON International was incorporated in 1976 under the Ministry of Railways and has since transformed itself into an integrated Indian engineering and construction company whose expertise ranges from building railways, highways, tunnels and flyovers to the development of commercial and residential properties. But its core competence lies in the areas of Railway and highway construction.
Since 1976, the company has completed over 380 Infrastructure projects in India and more than 127 projects across the globe in more than 24 countries.
1. Construction Business
IRCON’s order book mainly constitutes projects related to making new railway lines, bridges, tunnels, station buildings and railways electrification to construction of roads & highways. As the company is primarily an undertaking by the Government of India most projects are usually awarded to them directly or where applicable, indirectly through nomination. As of 31st March 2018, the construction business alone accounted for almost 99 % of IRCON’s total revenue.
2. Infrastructure Business
The company is also involved in developing and maintaining railways/roads on a BOT (Build-Operate-Transfer) basis where the company operates each completed project and profits are realized largely through toll collections. As on March 31st 2018, the total contribution from this business added up to about 1.5% of the total revenue.
Total Order book
As of 31 March, 2018, the company’s Order Book size stood at around Rs 22,000 crore out of which the Railway Segment alone accounts for 86 % of the order book, a data point clearly highlighting the company’s dependency on the railway sector
Why are order books important?
An order book represents the value of projects awarded to the company and for which it has entered into signed agreements but not commenced any work related to that and the value of the unexecuted portion of projects on which they have commenced work. Its important because an order book serves as an indicator of future performance since it represents a portion of anticipated future revenue.
But all this is immaterial so long as they continue to make lots of money with their current business operations. So are they ?
Well, Yes and No
The company’s revenue clearly has been on an uptrend over the past few years which is definitely a good sign for any company, but the problem lies in the bottom line. The company’s ability to generate consistent growing profits is a bit suspect as the company has failed to do so in the past few years.
However, the company has been more than consistent in paying out its dividend with payouts being as high as 48% the total profits.
Will they continue to pay dividends?
Under the Central Public Sector Enterprises (CPSE) Capital Restructuring Guidelines all central public sector enterprises are required to pay a minimum annual dividend of 30% of profit after tax or 5% of the net-worth, whichever is higher, subject to the maximum dividend permitted under the extant legal provisions.
The company has been debt free over the past until during the Financial Year 2017–2018, when it borrowed close to Rs 3203 crore from the Indian Railway Finance corporation at an interest rate of 8.77 % per annum.
This is interesting because the company has consistently been sitting on piles of cash — around 4600 crores over the past few years .Why do they need loans when they have boatloads of cash you ask ?
Well, its because the Infra business is working capital intensive. There is a high probability you might need to spend a lot without receiving any significant payment over the short term. So the company’s stand is that they might need to call upon this cash pile anytime there is a cash crunch.
The company plans to raise ~Rs. 467 crores by diluting 10 per cent stake as part of the government’s divestment plan. So, none of the money will go towards funding the business.
The company is listing at a P/E of close to 10. Well, that’s not really expensive but it pays to note that this is after all a public sector undertaking and profits over the years have largely been inconsistent. Maybe it could prove to be an excellent bet for the future so long as it can stay focused on high value projects and increase its profitability. But what if it fails to bag these high value projects? What if there are delays in regulatory approvals ? What about the company’s extreme dependence on railways?
We wish we could tell you but unfortunately we don’t have a crystal ball to peer into the future and so we will leave it at this. We here at Finception, wish the company all the best in its future endeavour.
Review & Analysis by Pawan, IIM Ahmedabad
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