Buy Madhucon Projects - Infra monolith in the making - Elara Capital

• Madhucon Projects
• Rating : Buy
• Target Price : INR208
• Upside : 42%
• CMP : INR147 (as on 29 October 2010)

Infra monolith in the making

Strong execution continues, results in line

MPL extended its growth momentum in Q2FY11 as it delivered revenues of INR3.5bn (+38% YoY). Though operating profits remained strong indicating a 19.1% YoY growth, OPMs were down 154bps YoY to 9.7% (vs our expectation of 10.4%) primarily on account of a more than two fold (YoY) rise in material consumption (pertaining to 300MW Phase I power project) at INR1.9bn. Lower other income (down ~86% YoY) coupled with higher interest (+161% YoY) charges ruined the party further at the net profitability level. Consequently, net profits for the quarter dipped by a massive ~44% YoY to INR67mn, though in line with our expectations (INR78mn).

No new orders in Q2FY11, backlog firm at ~INR46bn

The company boasts of a strong backlog, offering revenue predictability for the next 30-36 months. In terms of business segments, MPL's order book remains skewed in favour of construction works across its in-house assets in power (35%) and road BOTs (27%). In the irrigation division, the company is executing six projects (~26%), five in Andhra Pradesh alone while jobs across the mining (3%) and buildings (9%) verticals fill up the remaining pie.

Maintain estimates, price target of INR208

Despite a rollover of our valuation metrics to FY12 earnings estimates, our target price for MPL remains unchanged. Primary reason is the curtailment in our assigned P/E multiple to its core construction business (to 7x Vs 10x 1 year forward EPS earlier) in the light of its deteriorating balance sheet and poor return ratios, led by infusing equity into the asset development businesses by leveraging Holding Company books. Nevertheless, we strongly believe that MPL is close to making a successful transition from a sheer EPC contractor to a fully integrated infrastructure developer thus seeking a re-rating. We maintain Buy recommendation with a price target of INR208.

Source : Equity Bulls

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