Execution of BOT projects resulted in higher EBITDA margins

Net sales increased by 26.8% YoY to Rs 1433.7 million. EBIDTA margins increased by 270 bps to 14.5% on account of execution of BOT projects, which yield higher margins. · Depreciation for the quarter increased by 20.1% to Rs 88.6 million on account of increased capex (Rs 100 million in the quarter). · PBT during the quarter increased by 18.2% to Rs 121.5 million however increased taxation (24% as a percentage of PBT as compared to 11% in the corresponding previous quarter) on account of removal of benefit u/sec 80 IA resulted in flat growth in PAT. · Though the company would not be claiming benefits u/sec 80IA from this fiscal, its taxation levels would remain low at 24% of PBT due to investment made in equipments.

Order book at approx Rs 42 billion

The current order book of the company is Rs 42 billion, which translates into 8.2x FY07 revenues. The completion period of the projects ranges from 2-3 years.Of the total order book, roads constitute 64% while water related projects constitute 33%.

The company has vast experience & expertise in road construction projects, which has enabled it to bag 4 road projects on BOT basis.

Establishing presence in real estate

Madhucon has procured a real estate project for AP Housing Board for developing a housing-cum-commercial project along with a 400-room hotel at Kukatpally, Andhra Pradesh. The company has already invested Rs 480 million for a 9-acre plot from the Andhra Pradesh Government. Excavation work on the project has already started and the approval for the building plan is expected within 3 months. The real estate business is expected to contribute about Rs 100-120 million in FY09. We value the real estate project of the company at Rs 10 per share.

Foray into thermal power project

The company is foraying into production of thermal power in collaboration with Mahalaxmi Group of Andhra Pradesh. Following are the details.

Investment into Indonesian coal mining company

MPL has entered into coal mining in Indonesia through a wholly owned subsidiary PT Madhucon Indonesia. It has the right to explore & export coal. The company has tied up with ICICI Bank for provision of machinery cost for excavation. The management expects a return of 19% -20% on its investment. Revenues from the coal mining business are expected to accrue in FY09.

Business Prospects

Madhucon Projects has a proven track record in the roads segment. Its Low gearing & higher EBITDA margins (despite having greater exposure to road projects) on account of owned equipments are a key feature of the company. With the growing infrastructure demand, the company’s strong order book position & diversification into newer verticals like power generation & coal mining we are positive about the company.

Financial Estimates

We expect net sales to increase by 46% CAGR between FY07-09 from Rs 5100.5 million in FY07 to Rs 10828.2 in FY09E. Revenue from the coal & real estate businesses are expected to accrue from FY09, which we have not taken into account. · With margins in the roads segment dwindling we estimate we estimate MPL’s EBITDA margins to fall by 100 bps to 13% for FY08 & FY09. · Company’s debt free status would help to raise further funds for executing its projects & we do not contemplate any equity dilution going forward. Moreover, company’s investment in own equipments would help gain tax benefits in addition to higher depreciation charges. · We expect an EPS of Rs 14.4 & Rs 22.6 for FY08E & FY09E respectively.

Valuation

At the current price of Rs 242, present EV/EBIDTA valuations of 11.8x FY09 & PE valuations of 10.7x FY09 look attractive. · We value MPL on Sum of the Parts method. We value the BOT projects (4 roads & 1 real estate) at Rs 47 per share. · We value the core construction business of the company at 12x PE FY09E & 13xFY09E EV/EBITDA resulting in a value of Rs 265 per share. We have not taken into account valuations for coal mining & power generation business. · Looking at the growth in the construction business and the growing order book of the company we maintain a Buy on the stock with a target price of Rs 312. At the target price of Rs 312, the stock trades at 15.5x FY09 EV/ EBITDA & 13.8x FY09 PE.