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Madhucon Projects (MPL) reported top-line growth ahead of our estimates, led
primarily by pick up in execution in the power segment. However, earnings were
below our expectations mainly on account of higher interest cost and tax
provision. MPL’s order book at 2.6x FY2011E revenues, gives good revenue
visibility. Owing to the broadly in-line performance, we maintain our numbers
and Buy recommendation on the stock with a SOTP Target Price of `173.
Broadly in-line performance: For 2QFY2011, MPL reported robust 38.0% yoy
growth in top-line of to `351.6cr, marginally above our expectation of 36.0%.
OPM stood at 9.7% (11.2%) as against our estimate of 9.3%. We had estimated
margins to be weaker due the problems in Andhra Pradesh and higher share of
the power segment where MPL subcontracts majority of the work, which dilutes
margins. MPL posted 43.7% de-growth in earnings to `6.7cr v/s our de-growth
expectations of 28.8% owing to higher interest cost (up 160%) and tax provision
(~41%).
Outlook and Valuation: We believe that key triggers for MPL would be pickup in
execution in its development business and building an attractive asset portfolio
before raising funds via IPOs. However, we expect these to fructify somewhere in
FY2012 and based on market conditions prevailing then. Hence, we believe that
till then the stock would be a sector performer and real value would be created
only on unlocking at the subsidiary level. Based on SOTP methodology, we have
assigned a P/E of 10x on FY2012E earnings (`92.1/share), valued the BOT
projects on NPV basis (`52.0/share) and other investments in Madhucon Infra
and the real estate venture on BV (`25.2/share and `3.9/share respectively).
Thus, our SOTP Target Price works out to `173, implying an upside of 18% from
current levels. We maintain a Buy on the stock.
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