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Essel Group Acquires 10% Stake in IVRCL; Stock Up 2%

  • Infrastructure company IVRCL jumped 2% to Rs 65.65 on positive sentiments after Essel Group acquired 10% stake in the company. IVRCL presently has 11 BOT projects, of which around 4 are operational. Although the company has a healthy mix of irrigation orders and operational road projects, its earnings have remained lackluster over the past few quarters due to high working caiptal cost and huge debt.As of December 31 2011, the company had a debt to equity of 1.5 on a consolidated basis and its interest cost as a percentage of its operating profit is 56%, which is one of the highest in the industry. Also, its working capital days of 188 days at present is a concern. Besides, the company requires 600 crore of equity infusion in the next couple of years for road projects.

  • Essel Group, on the other hand, with its diversified profitable businesses has the financial muscle to infuse additional equity into the company. It makes sense for the Essel Group considering that it is already an established player in the infrastructure sector through its group company Essel Infra projects which operates in roads, power, water and urban infrastructure segments, say analysts.

  • This is what brokerages have to say on this deal

  • Nirmal Bang believes Essel picking up stakes in IVRCL is positive for the infrastructure sector as well as for the latter's shareholders. Also, Essel has informed the media about its intention to further increase its stake in the company. IVRCL's promoter, who held 11.2% in the company as of 31 December, 2011, is not interested in selling his stake. We believe this will set the stage for a hostile acquisition, which will be positive for minority shareholders. We retain our Buy rating on IVRCL with a target price of Rs70.Bank of America Merrill Lynch says, if Essel increases its stake in IVRCL this could cause the stock to rally above its fundamental fair value on strategic premium. Overall, the firm has a positive outlook even not withstanding takeover development that is happening right now. They believe that the company is well positioned to leverage the turn in the capex cycle in the near future.

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