The stock of infrastructure player IVRCL was pummelled on Tuesday after the company announced (on Saturday) a steep 85 per cent fall in net profits for the June quarter compared with a year ago.

Marked slowdown in project execution due to delays by sub-contractors and suppliers, higher input costs for which escalation clause is yet to be brought up and jump in interest costs were primary seasons for poor performance. The stock touched its 52-week low intra-day before closing 18 per cent lower on Tuesday.

Funding concerns

While IVRCL was affected by delay in project clearances in some of its road and irrigation projects in the March quarter, this time around, delays in execution due to funds crunch faced by its sub-contractors was stated to be the key reason for poor performance.

Slower execution led to sales expanding by a mere 1.5 per cent year-on-year. EBITDA margins, due to slow execution and not invoking the escalation clause in some of its projects (which require a 24-month period before making a claim) also led to operating profit margins dipping 2.1 percentage points to 5.6 per cent.

While the costs booked may be claimed with a lag, IVRCL's travails with its sub-contractors cause more concern. For one, the company has been forced to go slow on execution as a result of financing issues that the small-time contractors face with their banks. While this may delay execution in projects in the near-term, it may lead to default on project schedules if it continues for a couple of quarters.

With interest rates showing no sign of letting up and banks remaining cautious on lending, IVRCL would have to either extend financing to these companies or risk penalty for delay in execution.

That the company has extended financing to its suppliers is evident from its stretched working capital. The sum due to creditors has in fact come down by 14 per cent between March and June (to Rs 2,330 crore) as a result of money being paid in advance.

In other words, instead of being able to avail itself of a credit period for its purchases, IVRCL is having to pay advances to ensure that vendors do not delay supplies. Funding too does not come cheap. A 37 per cent jump in interest costs over a year ago, clearly suggests that the company has been stretching its own credit channels to pay the suppliers/sub-contractors in advance.

With new projects requiring funding, the advance payment practice, however temporary, has spooked the markets, what with execution too slowing down.

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