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EPC revenue ahead of estimate, but margin under pressure
Marg reported Q3FY11 standalone revenue of INR 3.2 bn (up 37% Q-o-Q), ahead
of our expectation of INR 2.5 bn, but PAT at INR 159 mn (up 19% Q-o-Q) was in
line with our estimate of INR 151 mn. While the top line jumped 54% Y-o-Y, PAT
declined 23% due to lower EBITDA margin from 16.6% to 10% Y-o-Y (due to the
greater blend of external projects) and also higher interest costs on account of
rising working capital requirements.
Karaikal port cargo at 1.1 MT due to seasonal factors
Karaikal port handled 1.1 MT in Q3FY11 (against 1.37 MT in Q2FY11) due to
cyclones/seasonal factors and reported revenue of INR 432 mn and EBITDA of
INR 175 mn. Management indicated that higher equipment hire costs and tax
provisions for prior period also impacted earnings. The company handled 3.7 MT
cargo for nine months and could handle upwards of 5 MT for FY11 . Despite
subdued volume for the quarter, revenue and earnings could be in line due to
higher realisation on account of better cargo mix (fertilizer at 24%) and revenue
from ancillary services like warehousing, packaging, among others.
Residential project launches at SEZ moderates; restructuring on cards
The SEZ business has moderated on account of lower revenue booked (due to
revenue recognition limitations of AS7 on booking of new residential projects)
while costs continued to be booked upfront because of which SEZ reported
EBITDA loss during the quarter. Management has guided for robust bookings
which will negate earnings impact in future. The company has decided to hive-off
non-SEZ residential projects to Marg Properties (a wholly owned subsidiary) that
will enable the parent company to focus on its core EPC business.
EPC orderbook robust; external orders pipeline strong
EPC order flow continued to be robust for the quarter. Current order book, at INR
35 bn (INR 28 bn internal & INR 7.6 bn external EPC orders), gives strong
visibility on standalone revenue.
Outlook and valuations: Positive; maintain ‘BUY’
Owing to slower–than-expected residential launches at the SEZ we have revised
down our SEZ numbers by ~10% for FY11 and have now valued only the external
EPC business at INR 19/share. We are introducing FY13 estimates and increasing
our Ke, in line with changes in macro assumptions to arrive at SOTP target price
of INR 333 and maintain ‘BUY’ recommendation on the stock.
Key operational highlights for the quarter
Karaikal port
• The port achieved a peak discharge rate of 55,576 MT in 24 hours on 30th Dec 2010
which is a national record for the highest discharge of coal through conventional
handling
• Average realisation increased to INR 390.6/tonne in Q3FY11 compared to INR
357.8/tonne in Q2FY11 due to higher share of fertilizer cargo handled during the
quarter (24% in Q3FY11 compared to 8% in Q2FY11).
• The company attributes margin dip in Q3FY11 to fixed costs associated with
equipment hire charges of the new mobile harbor crane (MHC) and berth No. 9 (a
multicargo berth for smaller vessels up to 25,000 MT). It has also made higher
income tax and deferred tax provisions during the quarter which has led to decline in
PAT margins as well.
• While we do expect some risk to our full year target of 5.5 MT cargo, nine months
EBITDA margin at 48% against our estimate of 42% for FY11 could make up for the
lower cargo volumes.
• Phase IIA development is on track with INR 11 bn of capex already incurred on the
project which is due for commissioning by Q3FY12.
Swarnabhoomi SEZ
• Marg, during the quarter, concluded an agreement with Strand Genomics for leasing
out 40,000 sq ft in the upcoming science park.
• Recent soft launches of residential projects (high rise apartments i.e. Sky Meadows
and low rise apartments i.e., Maha Utsav) have posted healthy bookings during the
quarter.
Real estate (commercial & residential)
• The company has sold 2.39 mn sft of residential space (2,231 units) till date and has
drawn plans to sell around 7.5 mn sft of space in the next 36 months.
• Steady demand across different housing segments has helped maintain growth
momentum in the residential business.
• Marg Junction, the commercial mall project on OMR road (Chennai), which had
roped in anchor tenants, has now signed up with some leading vanilla brands like
Rayban, HP, Marrybrown, and EOI’s from leading names like Marks & Spencer,
Odyssey, Reliance Trendz, Adidas, Bata, Lee, Wrangler, Sony, Kalaniketan, Naihaa,
Jashn, etc.
Company Description
MARG is a EPC and infrastructure company based in Chennai and has completed projects
in Tamil Nadu, Puducherry, Andhra Pradesh and Karnataka. The company focuses on
projects that provide opportunities of regional development to exploit the synergies of its
infrastructure and real estate business capabilities. Broadly, the company operates in
three segments, i.e. infrastructure (BOT assets), EPC and real estate.
Key Risks
High inter-dependence amongst various businesses
EPC earnings are the main source of cash flows over the medium term, and its revenues
/ margins are largely dependent on the captive real estate projects and port business.
Dependence on EPC earnings for equity funding of infrastructure assets, which are under
development / early stages of scaling up, causes a vicious cyclical impact on the
consolidated cash flows and, in turn, valuations.
Tight balance sheet and stretched cash flows could lead to further dilution
The company has been financing its big ticket infrastructure projects under different fully
owned SPVs at a debt-equity (D/E) ratio of 70:30 which has stretched the consolidated
balance sheet of the company. The company is currently walking a tightrope in managing
its cash flows and hence could resort to further fund raising.
Delay in commissioning of power plants and monetising of land parcel
Coal being the dominant cargo, its growth is contingent on the upcoming thermal power
plants in the hinterland area of the port. Any delay/cancellation in these plants would
lead to uncertainty in the amount of cargo handled at the port, impacting profitability of
the port. Further, any delay in monetising real estate land parcel, especially in SEZ, and
garnering better yields in its OMR mall, could hamper cash-flow/valuations of the assets.
Investment Theme
Changing tack; regional development model to drive growth
Marg’s business has transcended from being an asset light model to a mix of light and
heavy assets, with high visibility and a sustained earnings model. The company plans to
achieve this by setting up infrastructure assets and providing ancillary services to boost
development of the surrounding hinterland.
Port strategically located to tap thermal coal demand
Karaikal Port (KPPL), Marg’s flagship project, commenced phase I operations in June
2009 and has already handled ~2.5MT cargo in H1FY11. It has undertaken phase IIA
expansion to 21 MTPA. The port is well positioned to encash on bulk cargo demand due
to its strategic location, deep draft, faster turnaround time, and state-of-the-art facilities
compared with neighbouring major ports—Chennai and Tuticorin.
Improved traction in Chennai market to boost real estate business
Marg’s real estate business, especially at the Swarnabhoomi SEZ (on the outskirts of
Chennai), has picked up through improved land sale and lease rentals. Further, its multipurpose
mall at Karapakkam is first of its kind to address the underpenetrated organised
retail in Chennai’s OMR and increasing demand for office space by IT companies.
External EPC business gaining ground
Marg’s current ~INR 28.2 bn order book comprises 25% external contracts. It is
committed to enhance this share by forging alliances to develop a forte in roads and
irrigation by registering itself with various government bodies like Military
Engineering Services, Karnataka Housing Board, among others.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EPC revenue ahead of estimate, but margin under pressure
Marg reported Q3FY11 standalone revenue of INR 3.2 bn (up 37% Q-o-Q), ahead
of our expectation of INR 2.5 bn, but PAT at INR 159 mn (up 19% Q-o-Q) was in
line with our estimate of INR 151 mn. While the top line jumped 54% Y-o-Y, PAT
declined 23% due to lower EBITDA margin from 16.6% to 10% Y-o-Y (due to the
greater blend of external projects) and also higher interest costs on account of
rising working capital requirements.
Karaikal port cargo at 1.1 MT due to seasonal factors
Karaikal port handled 1.1 MT in Q3FY11 (against 1.37 MT in Q2FY11) due to
cyclones/seasonal factors and reported revenue of INR 432 mn and EBITDA of
INR 175 mn. Management indicated that higher equipment hire costs and tax
provisions for prior period also impacted earnings. The company handled 3.7 MT
cargo for nine months and could handle upwards of 5 MT for FY11 . Despite
subdued volume for the quarter, revenue and earnings could be in line due to
higher realisation on account of better cargo mix (fertilizer at 24%) and revenue
from ancillary services like warehousing, packaging, among others.
Residential project launches at SEZ moderates; restructuring on cards
The SEZ business has moderated on account of lower revenue booked (due to
revenue recognition limitations of AS7 on booking of new residential projects)
while costs continued to be booked upfront because of which SEZ reported
EBITDA loss during the quarter. Management has guided for robust bookings
which will negate earnings impact in future. The company has decided to hive-off
non-SEZ residential projects to Marg Properties (a wholly owned subsidiary) that
will enable the parent company to focus on its core EPC business.
EPC orderbook robust; external orders pipeline strong
EPC order flow continued to be robust for the quarter. Current order book, at INR
35 bn (INR 28 bn internal & INR 7.6 bn external EPC orders), gives strong
visibility on standalone revenue.
Outlook and valuations: Positive; maintain ‘BUY’
Owing to slower–than-expected residential launches at the SEZ we have revised
down our SEZ numbers by ~10% for FY11 and have now valued only the external
EPC business at INR 19/share. We are introducing FY13 estimates and increasing
our Ke, in line with changes in macro assumptions to arrive at SOTP target price
of INR 333 and maintain ‘BUY’ recommendation on the stock.
Key operational highlights for the quarter
Karaikal port
• The port achieved a peak discharge rate of 55,576 MT in 24 hours on 30th Dec 2010
which is a national record for the highest discharge of coal through conventional
handling
• Average realisation increased to INR 390.6/tonne in Q3FY11 compared to INR
357.8/tonne in Q2FY11 due to higher share of fertilizer cargo handled during the
quarter (24% in Q3FY11 compared to 8% in Q2FY11).
• The company attributes margin dip in Q3FY11 to fixed costs associated with
equipment hire charges of the new mobile harbor crane (MHC) and berth No. 9 (a
multicargo berth for smaller vessels up to 25,000 MT). It has also made higher
income tax and deferred tax provisions during the quarter which has led to decline in
PAT margins as well.
• While we do expect some risk to our full year target of 5.5 MT cargo, nine months
EBITDA margin at 48% against our estimate of 42% for FY11 could make up for the
lower cargo volumes.
• Phase IIA development is on track with INR 11 bn of capex already incurred on the
project which is due for commissioning by Q3FY12.
Swarnabhoomi SEZ
• Marg, during the quarter, concluded an agreement with Strand Genomics for leasing
out 40,000 sq ft in the upcoming science park.
• Recent soft launches of residential projects (high rise apartments i.e. Sky Meadows
and low rise apartments i.e., Maha Utsav) have posted healthy bookings during the
quarter.
Real estate (commercial & residential)
• The company has sold 2.39 mn sft of residential space (2,231 units) till date and has
drawn plans to sell around 7.5 mn sft of space in the next 36 months.
• Steady demand across different housing segments has helped maintain growth
momentum in the residential business.
• Marg Junction, the commercial mall project on OMR road (Chennai), which had
roped in anchor tenants, has now signed up with some leading vanilla brands like
Rayban, HP, Marrybrown, and EOI’s from leading names like Marks & Spencer,
Odyssey, Reliance Trendz, Adidas, Bata, Lee, Wrangler, Sony, Kalaniketan, Naihaa,
Jashn, etc.
Company Description
MARG is a EPC and infrastructure company based in Chennai and has completed projects
in Tamil Nadu, Puducherry, Andhra Pradesh and Karnataka. The company focuses on
projects that provide opportunities of regional development to exploit the synergies of its
infrastructure and real estate business capabilities. Broadly, the company operates in
three segments, i.e. infrastructure (BOT assets), EPC and real estate.
Key Risks
High inter-dependence amongst various businesses
EPC earnings are the main source of cash flows over the medium term, and its revenues
/ margins are largely dependent on the captive real estate projects and port business.
Dependence on EPC earnings for equity funding of infrastructure assets, which are under
development / early stages of scaling up, causes a vicious cyclical impact on the
consolidated cash flows and, in turn, valuations.
Tight balance sheet and stretched cash flows could lead to further dilution
The company has been financing its big ticket infrastructure projects under different fully
owned SPVs at a debt-equity (D/E) ratio of 70:30 which has stretched the consolidated
balance sheet of the company. The company is currently walking a tightrope in managing
its cash flows and hence could resort to further fund raising.
Delay in commissioning of power plants and monetising of land parcel
Coal being the dominant cargo, its growth is contingent on the upcoming thermal power
plants in the hinterland area of the port. Any delay/cancellation in these plants would
lead to uncertainty in the amount of cargo handled at the port, impacting profitability of
the port. Further, any delay in monetising real estate land parcel, especially in SEZ, and
garnering better yields in its OMR mall, could hamper cash-flow/valuations of the assets.
Investment Theme
Changing tack; regional development model to drive growth
Marg’s business has transcended from being an asset light model to a mix of light and
heavy assets, with high visibility and a sustained earnings model. The company plans to
achieve this by setting up infrastructure assets and providing ancillary services to boost
development of the surrounding hinterland.
Port strategically located to tap thermal coal demand
Karaikal Port (KPPL), Marg’s flagship project, commenced phase I operations in June
2009 and has already handled ~2.5MT cargo in H1FY11. It has undertaken phase IIA
expansion to 21 MTPA. The port is well positioned to encash on bulk cargo demand due
to its strategic location, deep draft, faster turnaround time, and state-of-the-art facilities
compared with neighbouring major ports—Chennai and Tuticorin.
Improved traction in Chennai market to boost real estate business
Marg’s real estate business, especially at the Swarnabhoomi SEZ (on the outskirts of
Chennai), has picked up through improved land sale and lease rentals. Further, its multipurpose
mall at Karapakkam is first of its kind to address the underpenetrated organised
retail in Chennai’s OMR and increasing demand for office space by IT companies.
External EPC business gaining ground
Marg’s current ~INR 28.2 bn order book comprises 25% external contracts. It is
committed to enhance this share by forging alliances to develop a forte in roads and
irrigation by registering itself with various government bodies like Military
Engineering Services, Karnataka Housing Board, among others.
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