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Madhucon Projects (MPL) reported broadly in-line numbers for 3QFY2011, with
the surprise on the margin front. MPL’s order book at 2.5x FY2011E revenues
provides good revenue visibility. However, we are revising our numbers for
FY2011 and FY2012 to factor in the lower top-line, other income and higher
operating margins. We maintain a Buy on the stock.
Broadly in-line performance: MPL reported a decent 25.6% yoy growth in top-line
to `352.1cr, albeit lower than our expectation of 46.8% growth. OPM stood at
12.7% (12.4%) v/s our estimate of 8.8% mainly on account of lower
subcontracting in the power segment. We had estimated weaker margins owing
to the problems in Andhra Pradesh and higher share of power segment where
MPL subcontracts majority of the work which dilutes margins. On the earnings
front, the company posted modest growth of 6.0% to `11.5cr as against our
expectation of `9.1cr. Earnings exceeded our estimate owing to higher OPM.
MPL’s order book at 2.5x FY2011E revenues provides good revenue visibility for
the next couple of years.
Outlook and Valuation: We believe the key triggers for MPL would be execution
picking up in its development business and building an attractive asset portfolio
before raising funds via IPOs. However, we expect the same to fructify in FY2012
and based on the 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. Employing the SOTP methodology, we have
assigned a P/E of 10x on FY2012E earnings (`89.9/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). We
maintain a Buy on the stock, with a SOTP-based Target Price of `171.
Higher interest cost restricts earnings growth in spite of decent top-line and
excellent OPM: The company posted modest 6.0% yoy growth in earnings to
`11.5cr on the back of spiraling interest cost, but came in lower than our
expectation owing to higher OPM. Short-term loans and increasing interest rates
were the reasons for the increase in interest cost.
Order book analysis – No order inflow during quarter
MPL’s order book, as on 3QFY2011, stood at `4,248cr (2.5x FY2011E revenues),
which was dominated by the power (43.7%) and road (26.0) segments. The
balance was contributed by the irrigation, real estate and mining segments. The
company did not bag any orders during the quarter. However, it is L1 for the
Barasat-Krishnagar BOT annuity road project.
We believe that ~20% of MPL’s orders are either slow moving/pending financial
closure, which would take time to start contributing to revenues. Also, funding and
overall liquidity plays a big role in MPL’s growth, as ~79% of the orders are
in-house. Hence, we believe that MPL deserves to be at a discount to its peers
owing to higher dependence on in-house orders and dependence on the equity
markets for raising capital.
Change in estimates
Traditionally, MPL has been registering very healthy and above-industry EBITDA
margins (13-15%) in the road and irrigation segments. However, in recent quarters
the company has been experiencing margin pressures owing to fixed price
contracts and high level of subcontracting in the power segment. Nonetheless, with
the road segment catching up, we expect MPL to register some margin
improvement. Hence, we have marginally tweaked our top-line and interest
estimates.
Outlook and Valuation
Over the years, MPL has heavily invested (~40% of capital employed as against
industry average of 15-20%) in the asset development business. Therefore, we
believe that the key triggers for MPL would be pickup in execution in its
development business and building an attractive asset portfolio before raising
funds via IPOs/PE. But, we believe that these plans will only fructify somewhere in
FY2012 and based on the market conditions prevailing then. Hence, till then we
expect the stock to be a sector performer and real value would be created only on
unlocking at the subsidiary level.
We have valued MPL at ~30% discount to its larger peers like NCC, IVRCL, HCC,
etc., given its scale of operations, high leverage on the balance sheet, consistent
delays in expansion plans and high dependence on captive orders for its core
construction growth. Based on SOTP methodology, we have assigned a P/E of 10x
on FY2012E earnings (`89.9/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, we maintain a Buy on the
stock, with a SOTP-based Target Price of `171.
Investment Arguments
Robust order book: As of 3QFY2011, MPL had an order book `4,248cr, which is
spread across the power, highway and irrigation segments. In recent times, the
company’s order book witnessed traction in the power segment, particularly
in-house (constitutes ~79% of the total order book). Therefore, we believe that the
funds raised from the recent NCD issue would ensure that the in-house projects
are on schedule and result in order inflow for the construction arm.
FY2011 project completion year: MPL has invested heavily (nearly 40% of balance
sheet) over the years in its asset owning arm, Madhucon Infra, which we believe
will generate inflows post FY2011 – being the year of project completion. All its
four road BOT assets are expected to generate cash flow from FY2012 onwards
and record top-line of `187.5cr in that year. Further, the company is expecting
completion of its first power project (300MW) by 1QFY2012 end. However, we
have factored in a nine-month delay in the project. On the coal mining front too,
the company has guided that FY2012 would see takeoff of nearly 1mn tonne of
coal production, which has also not been factored in by us given consistent delays
in the same.
Value unlocking at the subsidiary level key to enhance value: We believe that MPL
has a decent portfolio of road BOT assets (4 operational + 1 under development
+ L1stage), power projects (300MWx2 under development) and coal mining,
which has latent potential. However, we believe that faster execution and value
unlocking would enhance value. We expect the company to access the capital
markets in 2HFY2012, when it would have a decent portfolio of operational assets,
nearing completion and under development. Therefore, in the short to medium
term, the stock would continue to be a sector performer.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Madhucon Projects – 3QFY2011 Result Update
Angel Broking maintains a Buy on Madhucon Projects with a Target Price of Rs. 171.
Madhucon Projects (MPL) reported broadly in-line numbers for 3QFY2011, with
the surprise on the margin front. MPL’s order book at 2.5x FY2011E revenues
provides good revenue visibility. However, we are revising our numbers for
FY2011 and FY2012 to factor in the lower top-line, other income and higher
operating margins. We maintain a Buy on the stock.
Broadly in-line performance: MPL reported a decent 25.6% yoy growth in top-line
to `352.1cr, albeit lower than our expectation of 46.8% growth. OPM stood at
12.7% (12.4%) v/s our estimate of 8.8% mainly on account of lower
subcontracting in the power segment. We had estimated weaker margins owing
to the problems in Andhra Pradesh and higher share of power segment where
MPL subcontracts majority of the work which dilutes margins. On the earnings
front, the company posted modest growth of 6.0% to `11.5cr as against our
expectation of `9.1cr. Earnings exceeded our estimate owing to higher OPM.
MPL’s order book at 2.5x FY2011E revenues provides good revenue visibility for
the next couple of years.
Outlook and Valuation: We believe the key triggers for MPL would be execution
picking up in its development business and building an attractive asset portfolio
before raising funds via IPOs. However, we expect the same to fructify in FY2012
and based on the 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. Employing the SOTP methodology, we have
assigned a P/E of 10x on FY2012E earnings (`89.9/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). We
maintain a Buy on the stock, with a SOTP-based Target Price of `171.
EBITDA margins surprise positively, management expects upward movement: MPL
reported decent top-line yoy growth of 25.6% to `352.1cr, albeit lower than our
expectation of 46.8% growth. OPM stood at 12.7% (12.4%) higher than our
estimate of 8.8% mainly on account of lower subcontracting in the power segment.
We expected margins to be weaker due to the problems in Andhra Pradesh and
higher share of power segment where MPL subcontracts majority of the work in
turn diluting margins. However, management guided that given the work starting
on road EPC front (MPL’s forte) margins would improve. Further, with the power
project expected to get completed it would also aid margins. Management has
guided that the power project would be completed by 1QFY2012; however, we
are factoring in a delay of nine months.
On the BOT front, the company saw an improvement in its operational projects to
`10.2-10.6lakh/day for Agra-Jaipur and `7.4-8.1lakh/day for TN (DK)
Expressways, which are in line with our expectation. Management has indicated
that the remaining two projects would be operational by March 2011, implying a
delay of three months as compared to our expectation.
Higher interest cost restricts earnings growth in spite of decent top-line and
excellent OPM: The company posted modest 6.0% yoy growth in earnings to
`11.5cr on the back of spiraling interest cost, but came in lower than our
expectation owing to higher OPM. Short-term loans and increasing interest rates
were the reasons for the increase in interest cost.
Order book analysis – No order inflow during quarter
MPL’s order book, as on 3QFY2011, stood at `4,248cr (2.5x FY2011E revenues),
which was dominated by the power (43.7%) and road (26.0) segments. The
balance was contributed by the irrigation, real estate and mining segments. The
company did not bag any orders during the quarter. However, it is L1 for the
Barasat-Krishnagar BOT annuity road project.
We believe that ~20% of MPL’s orders are either slow moving/pending financial
closure, which would take time to start contributing to revenues. Also, funding and
overall liquidity plays a big role in MPL’s growth, as ~79% of the orders are
in-house. Hence, we believe that MPL deserves to be at a discount to its peers
owing to higher dependence on in-house orders and dependence on the equity
markets for raising capital.
Change in estimates
Traditionally, MPL has been registering very healthy and above-industry EBITDA
margins (13-15%) in the road and irrigation segments. However, in recent quarters
the company has been experiencing margin pressures owing to fixed price
contracts and high level of subcontracting in the power segment. Nonetheless, with
the road segment catching up, we expect MPL to register some margin
improvement. Hence, we have marginally tweaked our top-line and interest
estimates.
Outlook and Valuation
Over the years, MPL has heavily invested (~40% of capital employed as against
industry average of 15-20%) in the asset development business. Therefore, we
believe that the key triggers for MPL would be pickup in execution in its
development business and building an attractive asset portfolio before raising
funds via IPOs/PE. But, we believe that these plans will only fructify somewhere in
FY2012 and based on the market conditions prevailing then. Hence, till then we
expect the stock to be a sector performer and real value would be created only on
unlocking at the subsidiary level.
We have valued MPL at ~30% discount to its larger peers like NCC, IVRCL, HCC,
etc., given its scale of operations, high leverage on the balance sheet, consistent
delays in expansion plans and high dependence on captive orders for its core
construction growth. Based on SOTP methodology, we have assigned a P/E of 10x
on FY2012E earnings (`89.9/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, we maintain a Buy on the
stock, with a SOTP-based Target Price of `171.
Investment Arguments
Robust order book: As of 3QFY2011, MPL had an order book `4,248cr, which is
spread across the power, highway and irrigation segments. In recent times, the
company’s order book witnessed traction in the power segment, particularly
in-house (constitutes ~79% of the total order book). Therefore, we believe that the
funds raised from the recent NCD issue would ensure that the in-house projects
are on schedule and result in order inflow for the construction arm.
FY2011 project completion year: MPL has invested heavily (nearly 40% of balance
sheet) over the years in its asset owning arm, Madhucon Infra, which we believe
will generate inflows post FY2011 – being the year of project completion. All its
four road BOT assets are expected to generate cash flow from FY2012 onwards
and record top-line of `187.5cr in that year. Further, the company is expecting
completion of its first power project (300MW) by 1QFY2012 end. However, we
have factored in a nine-month delay in the project. On the coal mining front too,
the company has guided that FY2012 would see takeoff of nearly 1mn tonne of
coal production, which has also not been factored in by us given consistent delays
in the same.
Value unlocking at the subsidiary level key to enhance value: We believe that MPL
has a decent portfolio of road BOT assets (4 operational + 1 under development
+ L1stage), power projects (300MWx2 under development) and coal mining,
which has latent potential. However, we believe that faster execution and value
unlocking would enhance value. We expect the company to access the capital
markets in 2HFY2012, when it would have a decent portfolio of operational assets,
nearing completion and under development. Therefore, in the short to medium
term, the stock would continue to be a sector performer.
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