MBL Infrastructures - BUY:: Business Line

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The company maintains a balance between pure construction contracts and road development projects.

MBL Infrastructures executes construction contracts for industrial and residential clients. It has three roads being executed as a developer with a fourth already operational and has a foothold in urban infrastructure projects.

Added to this is the potential in road maintenance contracts where MBL has already made headway. The company also has strong operating margins and healthy interest cover, an important aspect where a good number of small developers are struggling for funding.

At Rs 186, the MBL stock trades at a modest 4.6 times trailing consolidated per-share earnings and 4 times estimated earnings for 2013-14. Valuations are at a discount to peers such as KNR Constructions, which trades at 7.7 times trailing consolidated earnings. Investors with a two-to-three year horizon can buy the stock. Exposure to the stock though should be limited given its small-cap status.

ROAD PROJECTS ON TRACK

The company executes construction projects for roads, industrial projects, railways, housing and other urban infrastructure, though its main focus is the road sector. In roads, it has moved up the value chain and turned developer. It has one operational project on which it is collecting toll — growth in collections has been healthy, expanding 24 per cent in the previous fiscal.

Besides this, it has three other projects as a developer, which it bagged towards the fag end of the previous fiscal. Projects are a mix of annuity and toll models, which balances a steady revenue stream with the riskier dependence on traffic. Stretches of Seoni-Katangi in Madhya Pradesh and Bikaner-Suratgarh in Rajasthan which the company is developing could bring in good traffic flow.

Unlike some peers which have made expensive bids, MBL’s bids appear reasonable. Toll collection has already begun on the Seoni stretch, though the project completion will take another 18 months or so. Financial closure of only one of the three development projects has already been achieved.

MBL also has contracts for operation and maintenance of roads — a lucrative business with many sections of highways now being complete and up for maintenance. Besides, the Ministry of Road Transport and Highways is looking to award such contracts to the private sector.

ORDER INFLOW

The order book stands at Rs 2,200 crore at end-September 2012, down from the Rs 2,500 crore at the start of the fiscal. Robust order inflow has not been the norm in the infrastructure sector for several quarters now.

Still, at Rs 106 crore for the September 2012 quarter, MBL has already improved on the order inflow of the preceding quarter and hopes to reach an order inflow of Rs 2,500 crore for the full fiscal. While this may be a tall order, MBL’s newfound presence in urban infrastructure projects and established relationships with State Public Works Departments could help it achieve at least part of this target.

The diversity of its order book could also help it improve order inflow better than its more concentrated peers. Further, pure construction contracts are currently more attractive and sought-after than project development, given the funding restraints in the latter. MBL’s expertise across segments will come in handy here.

Moreover, the pure construction contracts will help buffer near-term revenues in the time it would take for the company to complete road development projects. These road projects will offer MBL a steady revenue stream in the long term. MBL’s order book is 1.7 times FY-12 revenues. This offers near-term revenue visibility.

MARGINS STRONG

Backward integration into owning key equipment, leasing stone quarries, and so on, has helped the company maintain operating margins above most peers. Lower raw material costs in the first half of this fiscal have also aided margin improvement.

Consolidated operating margins for the six months ended September 2012 improved two percentage points to 16 per cent.

Revenues in this period dipped 2.6 per cent on a poor June 2012 quarter as quite a few projects were in the initial stages of execution and not revenue generative. Net profits were also down 3 per cent, with higher interest cost compensating the lower operating expenditure. Net profit margins held at 6 per cent.

The company’s consolidated debt-equity ratio stands at 1.3 times, lower than most peers. With funding for only one development project left, the debt-equity ratio is unlikely to spike sharply. Interest cover is reasonable at 2.8 times.

Over the past three years, consolidated revenues have grown at an annual rate of 35 per cent to Rs 1,265 crore in FY-12 while net profits have expanded 38 per cent in the same period.