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Published on: Nov. 17, 2020, 10:52 a.m.
Ircon up for grabs
  • Railway projects form the main part of Ircon's activities

By Sarosh Bana. Executive Editor, Business India

The government’s moves to disinvest in state-owned enterprises carry on with its plan to sell about 15 per cent of its stake in railway engineering company, Ircon International Limited, through an offer for sale (OFS) of shares. The Cabinet has sanctioned the finance ministry’s proposal to reduce government shareholding to 75 per cent in the railway firm.

The government, which currently holds 89.18 per cent of the equity in Ircon, proposes to list the OFS sometime next month, depending on market conditions prevailing then. The balance 10.82 per cent is held by the public, following the Central Public Sector Enterprise’s (CPSE’s) initial public offering (IPO) in 2018 that had garnered Rs467 crore. SEBI’s minimum public shareholding regulations require government equity stake to be brought down to 75 per cent.

A designated Category 1 Miniratna company, New Delhi-based Ircon was incorporated by the Ministry of Railways in 1976 under the name of Railway Construction Company Limited. Over the years, it has evolved into a leading turnkey construction company in the public sector, with operations across India and also in countries like Malaysia, the United Kingdom, Bangladesh, Afghanistan, Ethiopia, Mozambique, Algeria, Sri Lanka and Nepal.

Ircon’s domestic clientele is largely public sector companies like the Indian Railway divisions, National Highway Authority of India (NHAI), National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd (PGCIL), Bharat Heavy Electricals Ltd (BHEL), Delhi Metro, Damodar Valley Corporation, and Indian Oil.

Chairman and Managing Director S.K. Chaudhary says that while Ircon covers the entire gamut of construction activities and services in the infrastructure sphere, its core competences are railway and highway construction, engineering and construction of extra high voltage (EHV) sub-stations, and mass rapid transit systems (MRTSes). The company’s “vision” is to be recognised national and internationally as a construction organisation comparable with the best in the field.

Flow and ebb of income

Ircon’s revenues rose from Rs4,679.54 crore in 2018-19 to Rs5,441.72 crore in 2019-20, and net profit from Rs444.68 crore to Rs489.78 crore. Earnings per equity share have climbed from Rs47.28 to Rs52.08 over these two years. The latest half yearly income was, however, dismal, dropping from Rs2,421.14 crore on 30 September 2019 to Rs1,528.64 crore on 30 September 2020, with net profit too dipping from Rs228.93 crore to Rs116.09 crore. Earnings per share similarly dwindled from Rs4.87 to Rs2.47.

Ircon’s share price hovered around Rs80.75 on 11 November. At that market price, the government can hope to raise about Rs508 crore by selling a 15 per cent stake. Offers for Sale are also being planned for Indian Railway Catering and Tourism Corp Ltd (IRCTC) and Rail Vikas Nigam Ltd (RVNL).

The government has targeted raising Rs90,000 crore from disinvestment in CPSEs in the current fiscal. Its IPO in IRCTC in October 2019 had buoyed the markets, with investors oversubscribing it by 112 times. Only six other IPOs had seen a higher oversubscription in the previous five years, and IRCTC, with an issue price of Rs320, had ended its opening day at Rs728, a listing gain of 128 per cent, one of the biggest in recent times.

Ircon’s OFS had been contemplated in May last year, but had to be deferred as the company planned on fresh equity issuance.

An August Retail Research report of HDFC Securities maintains that Ircon is the only Indian public sector company to be ranked in last year’s list of ‘Top 250 International Contractors’ by the US’s Engineering News Record (ENR) magazine. The report points out that the company has to date executed around 3,025 projects in India, and an additional 110 in 24 other countries. “Due to the current Covid-19 situation, execution may see a significant drop during H1FY20, but the management expects to bring about a similar growth story as of FY20, from the second quarter of FY21E onwards,” notes HDFC Securities. “Railway projects form the main part of the company’s activities, and this is a main focus area of the government to augment economic activities.” It adds that the phased reopening of the economy is facilitating the gradual return of labour, and this will help ongoing projects to progress.

“We expect Ircon’s revenue/EBIT/PAT to increase at a CAGR of 4.8/5.9/5.8 per cent over FY20-22E,” the Retail Research report indicates. “The company is largely insulated from the effects of the pandemic, due to its committed orders and thrust by the government to incur Capex by PSUs.” It adds that Ircon had also “aggressively” reduced its debt, whereby its debt equity ratio came down from 0.78:1 in 2018-19 to 0.44:1 in 2019-20. According to the report, Ircon’s order book of Rs30,713 crore is equivalent to almost six years’ sales and hence provides enough revenue visibility.

“We feel that investors can enter the stock at the last traded price (LTP) of Rs95.4 (7.9xFY22E EPS and 4.0xFY22 EV/EBITDA) and add on dips to a Rs86.5-88.5 band (7.25xFY22E EPS and 3.5xFY22 EV/EBITDA),” the report suggests. “We think the base case fair value of the stock is Rs105.5 (8.75xFY22E EPS and 4.6xFY22 EV/EBITDA) and its bull case fair value is Rs114.6 (9.5xFY22E EPS and 5.2xFY22EV/EBITDA) over the next two quarters.”

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