MBL Infrastructures - BUY:: Business Line

MBL Infrastructures Ltd. On a steady growth trajectory ::BP Wealth

MBL Infrastructures Ltd.
On a steady growth trajectory
Results Highlights
 The company’s revenue declined by 13.4% yoy to Rs. 2,682 mn. This was due unbilled work at
ten ongoing projects which has not reached significant level of billing as per the percentage
completion method of accounting followed by the company. The work at these project is going at
a full swing and the revenue is expected to flow from these project during Q3 & Q4FY13. We
also saw slow execution at the Orissa BOT projects resulting in low revenue.
 During the quarter we saw a decline in EBIDTA margins which stood at 12.5% down by 77 bps
yoy, primarily due to higher construction expenses and employee cost.
 During the quarter PAT margins were down by 125 bps yoy at 5.2%, primarily due to rise in borrowing
cost as a percentage of sales by 135 bps yoy at 4.3%.

MBL Infrastructures: Strong road BOT Portfolio: BP Wealth

Results Highlights
 The topline of the company stood at Rs. 4,550 mn a growth of 18% yoy. We saw good execution
on the EPC front especially road segments. Management has informed that substantial construction
work has commenced on recently procured road BOT projects at Waraseoni Lalbarra &
Seoni Katangi.
 During the quarter EBIDTA margins remain subdued at 9.9% a up 17 bps yoy, primarily due to
higher operating expenses and employee cost. Management has guided to maintain its margins
at ~12.5%.
 Adjusted net profit margins for the quarter stood at 4.4% a decline by 39 bps yoy. High cost of
borrowings, rise in depreciation and higher tax outgo resulted in reduction of margins. Interest
cost as a percentage of sales stood at 3.1% a rise of 152 bps yoy. Average cost of borrowings for
the company stood at 12.5% and the management has guided to maintain a margin at ~5.5% .

MBL Infrastructures - BUY :: Business Line,

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A pick-up in road project orders has helped construction company MBL Infrastructures bag two projects in the space of three months. These projects hasten MBL's move up the value chain to develop projects, from being a construction contractor.

With backward integration lending to better margins, steady order flow, and regular construction contracts to boost near-term revenue inflow, MBL Infrastructures is an attractive buy for investors with a two to three year horizon.

At Rs 167, the stock is at a modest four times trailing twelve months earnings per share. Peers such as KNR Constructions trade at similar multiples, but MBL has managed more consistent growth. However, with MBL being a small-cap stock, investors are advised to limit portfolio exposure to it.

GOOD ORDER INFLOW

MBL executes contracts for road and industrial constructions. Fresh order inflow in the recently-ended fiscal was over Rs 2,000 crore. Current order book, at Rs 2,636 crore, is more than double that at end-March '11. Order book stands at 2.45 times the annualised revenues for 2011-12 and with an average execution period of 24 months, it offers good medium-term revenue visibility.

MBL is also geographically diversified and has executed projects in tougher terrain such as Bihar and Assam, where competition is also less intense. It plans to move into urban infrastructure and railway projects which could aid better margins. Most projects are funded by institutions such as the Asian Development Bank, which alleviates risk of payment delays.

SCALING UP

MBL has one road project as a developer, which has been generating toll revenues. Being a new entrant in the road development field, MBL partnered SREI Infrastructure to win two projects. On the first of these, revenue collection has begun. MBL has two more projects on a solo basis.

Though partnerships may limit revenue flows in the near term, they have many benefits. For one, the company can qualify for much larger projects than in an individual capacity. Two, it limits debt commitment on MBL's part, which will help it maintain a healthier balance-sheet. Three, it helps a gradual build-up on individual bidding capacity. Financial closure has been achieved for all road projects, save one, which was bagged in January this year.

STEADY MARGINS

Consolidated revenues have grown at a compounded annual rate of 50 per cent over the past three years to Rs 1,001 crore. Net profits grew 58 per cent to Rs 62 crore in the same period. For the nine months ending December '11, revenues expanded 31 per cent.

However, higher input costs, increase in interest costs and tax outgo led to slower profit growth. Operating profits grew 24 per cent, while net profits grew 8 per cent for the nine months ending December ‘11.

Still, the company kept a control over staff costs and, helped by backward integration, maintained operating margins at 15 per cent. Interest costs, up by 45 per cent are, however, likely to remain high, given the company's projects taken up on a development basis.

Some comfort is derived from operating profits covering interest costs by over three times, better than some peers. Debt-equity is also on the lower side at 1.1 times compared to peers.

MBL Infrastructure Ltd.:Growth in Order Book Inflow :BP Equities Research

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Growth in Order Book Inflow
Results Highlights
⇒ The topline of the company stood at Rs. 3,397 mn a growth of 26.9% yoy. Second half of the year
being strong in term of execution which is being reflected in the topline of Q3FY12 and we expect
the same run rate to continue. We saw good execution on the EPC front especially road segments.
Management has informed that substantial construction work has commenced on newly
procured road BOT projects.
⇒ EBIDTA margins stood at 15.3% a decline of 46 bps yoy, primarily due to higher operating expenses
as a percentage of sales by 66 bps yoy. Management has guided to maintain its margins
between 13% to 14%.
⇒ Adjusted net profit margins stands at 6.6% a decline of 208 bps yoy. High cost of borrowings,
rise in depreciation and higher tax outgo resulted in reduction of margins. Interest cost as a percentage
of sales stands at 4.6% a rise of 85 bps yoy. Average cost of borrowings for the company
stands at 13% and we expect steady margins for the next few quarters.
Other Highlights
⇒ Order book of the company stands at ~Rs. 22.2 bn constituting 21 projects and the major order
flow constitutes from govertment organization. The order book to bill ratio stands at 2.2x FY11
sales which gives us the revenue visibility for next two years. The fresh order inflow for last four
months stood at ~Rs 11 bn while year to date fresh order inflow stood at ~Rs. 14 bn. Outstanding
bids for various projects as on date stands at ~120 bn. We expect order inflow to improve which
was not the case nine moths back which saw aggressive biddings. Now we see upward correction
cycle in the industry which would increase the fresh order book inflow and we have estimated
fresh order inflow of ~Rs. 30 bn in FY13.
⇒ On the BOT projects front company has started booking revenue on the Rimuli Roxy Rajamunda
project, Orissa (Toll) where the company has 50% stake while, the balance is with SREI infra and
company has made equity investment of Rs 250 mn as on date. The other two BOT projects i.e.
Seoni Katangi, MP (Toll) bagged during second quarter and Waraseoni Lalbarra, MP (Toll + Annuity)
bagged last quarter has achieved financial closure and substantial construction work has
started as informed by the management. The new BOT project Bikaner Suratgarh, Rajasthan
(Toll) bagged in the month of Jan 2012 in 50:50 JV with SREI Infra costing ~Rs. 5 bn is expected
to achieve financial closure by end of FY12.
Outlook
In view of the growing order book flow form NHAI, efficient execution of ongoing projects, backward
integration and improving track record, we expect the company’s top line to grow at a healthy CAGR
rate of ~30% during FY11A to FY13E.The company is well poised to capitalise on the opportunities
and grow faster than its peers. The company is also diversifying into dedicated freight corridor which
will give company an opportunity in different line of segment. With the increase in BOT project from
one to five projects which will improve the cash flow of the company going forward. We maintain
“Buy” on the stock with a target price of Rs 265, an upside of 50% from the present levels based on
SOTP method of valuation.

MBL Infrastructures -Near term visibility concerns:: Elara

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Near term visibility concerns
Key takeaways from the management meet
In our recent interaction with MBL, the management team reaffirmed
its confidence to achieve INR10bn in revenues for FY11. Revenue
visibility for FY12 though still remains hazy with no major order inflows
in Q3&Q4 FY11, leading to a (worrying) backlog to FY11E revenues
ratio of 1.4x. The company maintains its expectations of healthy
inflows for FY12 with orders worth INR100bn (across 40 projects)
under bidding, pre-qualification and final award stages, including the
INR40bn NHAI BOT based projects. A marked pick up in project
awarding is expected by Jun-Jul’11.

MBL Infrastructures: Great going; Buy Target Price : INR254 Upside : 30%: Elara

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Great going
Blockbuster quarter, results significantly ahead of estimates
MBL witnessed a bumper quarter with revenues rising by a whopping
63.5% YoY to ~INR2.7bn, led by a significant work completion on road
projects in MP, Delhi and Bihar. OPMs too expanded by 164bps YoY,
majorly owing to a decline in construction expenses by 182bps YoY.
Flourishing on a heightened operational efficiency, aided by stable
interest and depreciation charges, net profits for the period leaped by
125.8% YoY to INR228mn (vs our expectation of INR145mn).
Backward integration enables better OPMs, return ratios
With a view to induce operational efficiency and cost control, MBL
forayed into the RMC and quarrying and mining businesses ensuring
adequate and timely supply of high quality raw materials. In addition,
an ownership of the critical equipment base and a bunch of 400
technically qualified and skilled personnel have not only aided in rapid
mobilization, serving multi-locational requirements, but also imparted a
competitive edge against peers. These factors have lent a support to
deliver an enhanced business volume while maintaining a better
operating profitability as demonstrated by MBL’s five year average
OPMs, RoCE and RoNW of 12.7%, 25.3% and 28% respectively.

Business Line recommneds: buy MBL Infrastructures

Investors with a high-risk appetite and with a two-three year perspective may add the stock of construction contractor MBL Infrastructures.

At Rs 273, the stock is 11 times its trailing four-quarter earnings and 9 times estimated FY11 earnings. Peers such as KNR Constructions and PBA Infrastructure trade at similar valuations. Backward integration leading to strong operating profit margins, a healthy order book, secure client base, graduation to a road developer and wide geographic presence bode well for this construction contractor.

Segment presence

MBL is a construction contractor, primarily in the roads segment. Apart from construction, MBL offers road maintenance, which could be a lucrative segment as the developed road network increases and turns operational.

While a concentrated presence in roads does heighten risks, a good portion of MBL's projects are from the municipal and Public Works Departments of various States (such as Haryana and Uttrakhand), Mumbai, and so on. A clientele such as this offers good scope for repeat orders. Projects are also funded by larger, reputed institutions such as the Asian Development Bank.

Besides, it has a presence in the rather lesser penetrated regions of the north-east, especially Assam. As these regions typically have tough terrains, there are fewer competitors and, therefore, profitability on the projects is better.

Geographically, MBL has a wide presence in about 14 States. Still, the company also undertakes industrial constructions, from institutions such as SAIL. Plans are afoot to increase its presence in this sector as well as urban infrastructure.

Construction contracts aside, MBL graduated to the level of a developer undertaking projects on a build-operate-transfer basis. It has one operational toll project, with a road length of 114 km, from which it earned Rs 8.1 crore in FY-10. It recently won another BOT project, in consortium with SREI Infrastructure Finance, in Orissa with a concession period of 19 years.

Securing such projects in consortium, besides providing financial qualification, will allow it to gradually scale up enough to qualify for large-sized orders on its own.

Meanwhile, MBL is still in a position to secure construction projects as large road developers look to subcontract their projects.

Order book value stands at Rs 1,500 crore, up from the Rs 815 crore at the end of December 2009. With an average execution period of 24 months, and at 2.4 times the revenues for FY-10, the order book offers medium-term earnings visibility.

MBL had a division which undertook waste and slag management of steel plants, which it discontinued at the close of FY-10 since it made thin margins. Given that the segment also adds little to its capacity in road construction, closing it may allow MBL to focus resources on its core segment.

Backward integration

MBL had raised Rs 100 crore through a public issue early this year, of which about half was utilised to purchase capital equipment. Along with such equipment, MBL has a Ready Mix Concrete division and stone quarries which feed its construction activities. This afforded a degree of control over input costs, resulting in healthy operating profit margins of 15 per cent for FY-10, a level that was maintained for the two previous years as well.

Revenues grew at a three-year compounded annual rate of 55 per cent at the consolidated level to Rs 637 crore, while net profits grew 54 per cent to Rs 37 crore. MBL met its issue objectives of funding working capital, which, having come in the last quarter FY-10, increased the working capital turnover from four to about five-and-a-half months.

Higher interest outgo led to net margins at 6 per cent, well below its operating margins. Net margins have also been maintained at the same levels from FY-08 onwards. Current debt:equity is still at a fairly reasonable 0.9 times, providing scope for further leveraging for future projects..

Business Line recommneds: buy MBL Infrastructures

Investors with a high-risk appetite and with a two-three year perspective may add the stock of construction contractor MBL Infrastructures.

At Rs 273, the stock is 11 times its trailing four-quarter earnings and 9 times estimated FY11 earnings. Peers such as KNR Constructions and PBA Infrastructure trade at similar valuations. Backward integration leading to strong operating profit margins, a healthy order book, secure client base, graduation to a road developer and wide geographic presence bode well for this construction contractor.

Segment presence

MBL is a construction contractor, primarily in the roads segment. Apart from construction, MBL offers road maintenance, which could be a lucrative segment as the developed road network increases and turns operational.

While a concentrated presence in roads does heighten risks, a good portion of MBL's projects are from the municipal and Public Works Departments of various States (such as Haryana and Uttrakhand), Mumbai, and so on. A clientele such as this offers good scope for repeat orders. Projects are also funded by larger, reputed institutions such as the Asian Development Bank.

Besides, it has a presence in the rather lesser penetrated regions of the north-east, especially Assam. As these regions typically have tough terrains, there are fewer competitors and, therefore, profitability on the projects is better.

Geographically, MBL has a wide presence in about 14 States. Still, the company also undertakes industrial constructions, from institutions such as SAIL. Plans are afoot to increase its presence in this sector as well as urban infrastructure.

Construction contracts aside, MBL graduated to the level of a developer undertaking projects on a build-operate-transfer basis. It has one operational toll project, with a road length of 114 km, from which it earned Rs 8.1 crore in FY-10. It recently won another BOT project, in consortium with SREI Infrastructure Finance, in Orissa with a concession period of 19 years.

Securing such projects in consortium, besides providing financial qualification, will allow it to gradually scale up enough to qualify for large-sized orders on its own.

Meanwhile, MBL is still in a position to secure construction projects as large road developers look to subcontract their projects.

Order book value stands at Rs 1,500 crore, up from the Rs 815 crore at the end of December 2009. With an average execution period of 24 months, and at 2.4 times the revenues for FY-10, the order book offers medium-term earnings visibility.

MBL had a division which undertook waste and slag management of steel plants, which it discontinued at the close of FY-10 since it made thin margins. Given that the segment also adds little to its capacity in road construction, closing it may allow MBL to focus resources on its core segment.

Backward integration

MBL had raised Rs 100 crore through a public issue early this year, of which about half was utilised to purchase capital equipment. Along with such equipment, MBL has a Ready Mix Concrete division and stone quarries which feed its construction activities. This afforded a degree of control over input costs, resulting in healthy operating profit margins of 15 per cent for FY-10, a level that was maintained for the two previous years as well.

Revenues grew at a three-year compounded annual rate of 55 per cent at the consolidated level to Rs 637 crore, while net profits grew 54 per cent to Rs 37 crore. MBL met its issue objectives of funding working capital, which, having come in the last quarter FY-10, increased the working capital turnover from four to about five-and-a-half months.

Higher interest outgo led to net margins at 6 per cent, well below its operating margins. Net margins have also been maintained at the same levels from FY-08 onwards. Current debt:equity is still at a fairly reasonable 0.9 times, providing scope for further leveraging for future projects..