Diversified order book provides decent revenue visibility for Madhucon Proj

The government has huge plans for infrastructure development in power, roads and irrigation segments in order to maintain high economic growth. Madhucon Projects Ltd, a mid-size infrastructure developer is set to benefit from large investments in the infrastructure space.

Business
Madhucon Projects primarily operates as an engineering, procurement and construction (EPC) contractor and also undertakes projects on build, operate, and transfer (BOT) basis. The company also executes projects related to expressways and national highways, flyovers, bridges, irrigation water supply, industrial and real estate.

The Hyderabad-based company has a total order backlog of around `4,900 crore. Power projects constitute 35% of the order backlog, while roads and irrigation projects constitute around 25% each. Real estate projects and mining account for the rest of the order book.

However, in-house projects from its subsidiaries comprise around 70% of the order book, while government and private client orders form the rest.

Madhucon’s power projects include setting up 1,920 megawatt (mw) thermal power plant through its subsidiary Simhapuri Energy. The first phase of 270 mw is likely to get commissioned by March 2011, while phase-II, incorporating another 300 mw has achieved financial closure. The company has already signed power purchase agreements and fuel linkages for the first phase.

In the roads segment, Madhucon has four BOT toll-based national highway projects of which two have been commissioned and have started generating revenues while other two bigger ones are awaiting notifications to start tolling. These four projects would together give revenues of around `45 lakh per day once they are fully operational.

Madhucon has two coal mines through its Indonesian subsidiary ‘PT Madhucon’ Indonesia. The company plans to partly start mining at its 9,000 hectare South Sumatra mine (with total reserves of 900 million tonne) in the coming months and targets to extract and sell 0.4-0.5 million tonne (mt) coal this fiscal. The other mine at Jakarta, spread over 4,000 hectare, is expected to start commercial production in the next 2-3 years.

In the property development segment, Madhucon’s mixed development project comprising a residential complex, 4-star hotel and shopping mall in Hyderabad is likely to be completed in the next two years.

Investment rationale
The government plans to double investments in key infrastructure projects to `41 lakh crore in the XIIth five-year plan. Madhucon has been pre-qualified in EPC projects worth `10,000 crore in irrigation, highways, railway, power and transmission line projects.   Madhucon’s strong and diversified order backlog provides a decent revenue visibility over the next 2-3 years.

The company’s road BOT projects, power and coal mining segments would start contributing to revenues from this year. Also, these projects with higher returns on equity (ROEs) would boost operating margins as the company currently has low margins in its power and road EPC projects.

Further, Madhucon has recently restructured its infrastructure assets by transferring its investments in power, roads and coal assets to its intermediary level infra holding subsidiary, Madhucon Infra Ltd.  The company plans to come out with an IPO for this arm by next year.  

Concerns
Being in the infrastructure segment, Madhucon faces business risks such as delays in execution, payment in its irrigation projects in Andhra Pradesh due to the ongoing Telengana crisis there. The company, which is currently investing heavily in infra assets is likely to see its interest cost burden rise for next couple of years. Also, it may face margin pressures on account of adverse movements in raw material costs.

Valuations
Madhucon’s road and coal mining projects coming on stream and a strong order book provide good visibility for revenue growth over the next few years. They are expected to grow at a compounded annual growth rate (CAGR) of 26% over FY10-FY12 and net profits at a CAGR of 28% over the same period. At a current market price of `154.20, Madhucon trades at 20.43 times its expected FY11 earnings and 16.14 times its FY12 earnings per share. In view of its strong order book and presence in diversified infrastructure segments, the stock can be looked at current levels from medium to long term perspective.

Disclaimer: The writer does not hold any share in the company.