Bidding war in IVRCL? Perfect time to buy the stock

Expect some heavy-duty action in IVRCL's shares in days to come. There is a hostile bid on the company by media baron Subhash Chandra through his Essel Group of companies. The group already has a higher stake than the current promoters.

A statement issued by the company says: 'In line with the philosophy to grow the infrastructure business to match and benefit from the rising proportion of infrastructure investment by India, the Essel Group has acquired a 10.19 per cent stake in IVRCL Ltd and is keen to increase it and is in the process of increasing it."

News report says that Sudhir Reddy, founder of IVRCL, has no intention of fading into the night quietly and intends on fighting any possible Essel bid to take over the company. Reddy is rallying support from other infrastructure companies in south India. Reports say that over half a dozen companies are willing to lend the money he needs should he decide to buy shares from the market. Reddy currently holds 11.18 percent in the company.

Companies that have jointly bid with IVRCL for projects as well as sub-contractors are willing to bankroll Reddy in his bid to increase his stake in the company.

But what makes the Essel group interested in IVRCL?

Essel itself has a presence in the infrastructure sector through its company, Essel Infraprojects, which has interests in roads, power, water assets, solid waste management, urban infrastructure and special economic zones (SEZs).

While IVRCL is present in most of the above-mentioned areas, it also holds value through its controlling stake in Hindustan Dorr-Oliver. Further, IVRCL also owns UK-based DavyMarkham, a company engaged in the manufacture and fabrication of heavy machinery used in the mining, nuclear, power generation and steel sectors.

Further, neither IVRCL nor its promoters are in the best of financial health, which makes the company a ripe take-over target. While the company's profit has fallen from Rs 283.44 crore in 2008 to Rs 50.6 crore in March 2011, the company's debt has climbed from Rs 1,724 crore to Rs 4,304 crore in March 2011. As a result, interest costs, as a percentage of operating profit, during the same period have increased from 13 percent to 56 percent, indicating that a large chunk of the profits are taken away to service debt.

No doubt then that the investing and fund management community is in favour of the Essel group taking over the company. Essel group, with its deep pockets, will be in a better position to bid and win more projects than the IVRCL management. View of the investing community is important as funds hold 42.5 percent of the company, much higher than the promoters stake of 11.2 percent.

Further, even though joint venture partners and sub-contractors have agreed to fund Sudhir Reddy to increase his stake, the funding will come at a cost, which might not be in the best interests of the shareholders.

To date, the Essel group has pumped in Rs 164 crore to build its stake. As per the new takeover norms by markets regulator Sebi, an acquiring company has to increase its stake up to 25 percent in a company to trigger the code. When triggered, the acquirer has to make an open offer to pick up 26 percent from the public.

Whatever the outcome of the hostile takeover, this is a good time to jump into the stock as each party will be keen in increasing their stake to gain control.