PINC Re-initiating Coverage on Madhucon Projects Ltd

Core business in the price, Infrastructure projects execution - key for re-rating

Infra Vertical - FY11 the threshold for project completion

Our analysis suggests that the Madhucon Projects Ltd's (MPL) Phase I power project provides a healthy business proposition with RoE of 24.7%. The coal mining business will start contributing to profits FY11 onwards on external sales, as MPL's power capacities go on stream FY13 onwards. Road toll revenue has just begun and would touch Rs1.7bn by FY12. Hence, FY11 would be an inflection point where MPL builds threshold infrastructure vertical capacities that would be important for its re-rating.

Core business: external order flow key for re-rating

Our FY11 and FY12 revenue growth forecasts of 15.1% and 25.9% are underpinned by higher execution from the Phase I power project (85% of contracted EPC work assumed to be complete by end-FY11), mining, and road orders in FY11.We expect operating margins to be lower at 10.1% for both years since we expect higher subcontracting work owing to the power EPC. We value the core business at 11x FY11E earnings of Rs7.4 at Rs81.1 per share.

Order book flat YoY - captive orders the saviour

Nearly 56% of MPL's Rs50.1bn current order book comprises internal orders from the Power and Road BOT subsidiaries. External order flow was muted in the past three years with average inflow of Rs3.5bn. Thus, for the core EPC business, internal order execution would be the focus area that would drive medium-term visibility. Moreover, 25% of total orders are from AP irrigation where execution and new order placement have slowed down.

VALUATIONS & RECOMMENDATION

We re-initiate our 'BUY' recommendation with a SOTP target price of Rs170 (19% upside). We value the core construction business at Rs79.3, 11x FY11E EPS, Road BOT on DCF basis at Rs54.8, and phase I of the power project at Rs26.5. The book value of hotel and mines business is Rs3.9 and Rs5.3 respectively. The performance of the stock would be largely influenced by MPL's ability to achieve commissioning of its power and coal ventures, which are important thresholds for listing the infrastructure vertical (MIP). We believe the IPO to take place in FY12. In FY11, we would watch out for the capex progress made by the company.

Source : Equity Bulls

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