MBL Infrastructures IPO Analysis

MBL Infrastructures (MBLIL), promoted by Ram Gopal Maheshwari, Anjanee Kumar Lakhotia and Maruti Maheshwari, is a construction company focused on construction of highways, road maintenance, industrial infrastructure projects and other civil engineering projects. Not limiting itself to job contracts, the company moved up the value chain and has developed build-operate-transfer (BOT) road project through its wholly owned subsidiary APP Infrastructure. The company is also engaged in steel trading and waste management (ferrous scrap and slag recycling) at major steel plants. Contribution of this low margin waste management and trading business was 29% of the consolidated revenue in fiscal ending March 2009 (FY 2009), with the balance from construction and project development business.

Incorporated in 1995 as Maheshwari Brothers, the name was changed to the current MBL Infrastructures in July 2006. Initially, MBL was engaged in the business of recycling ferrous scrap and slag at steel plants and in steel trading, but subsequently diversified into infrastructure development (primarily road projects), serving government clients like the the Public Works Department of various state governments and the National Highways Authority of India (NHAI).

MBLIL is an integrated player with its own ready mix concrete (RMC) and bitumen plants and stone quarries/ mining. Apart from catering to captive needs, the RMC and quarry divisions of the company supplies surplus production to third parties.

In 2002, it was awarded the development of the 114-km Seoni-Balaghat-Rajegaon road project on BOT basis by Madhya Pradesh Road Development Corporation (MPRDC), with concession period of 5,440 days (or 15 years). All phases of this BOT project was fully completed in FY 2008 and are currently operational.

MBLIL was among the first batch of contractors to be awarded the contracts of the prestigious North-South-East-West Corridor by the NHAI and was the first to complete the project. It was also the first to be awarded the comprehensive maintenance of Ring Road and outer Ring Road, which are the most important corridors of Delhi. MBLIL also has early mover advantage for maintenance and operation of National Highways.

The company intends to use the issue proceeds to meet capital expenditure on procurement of construction equipments, funding working capital requirements and meeting general corporate requirements.

Strengths

Total order book end June 30, 2009 was Rs 872.12 crore excluding the share of other joint venture (JV) partners in projects bagged in JV. The share of orders bagged solely by the company amounts to Rs 585.12 crore. Of the total order book of Rs 872.12 crore, the unexecuted order backlog end June 2009 was Rs 612.47 crore. Post June 30, 2009, the company has received contracts worth Rs 202.82 crore.

The operational BOT project provides steady cash flow to the company. The toll revenue for the fiscal ended March 2009 was Rs 7.80 crore and in August 2009 the monthly revenue stood around Rs 66.72 lakh. The annual rate increase in toll rates is 7% as per the concession agreement.

The outlook is buoyant for the construction industry and more specifically the road construction, with the NHAI being more active in tendering and awarding more road projects after the UPA government came back to power in May 2009. The road sector is expected to be on a high growth path. The government of India has created a conducive environment conducive for private investments. The NHAI has set a target of 135 projects covering 13,394 km with an investment of Rs 1000 billion to be awarded by June 2010. Out of these, the NHAI plans to award 70 projects covering 7968 km with an investment close to Rs 616 billion over the next two quarters.

Having bagged the contract for comprehensive maintenance of ring road and outer ring road from the National Capital Territory Delhi on global tenders, the company enjoys early mover advantage as far as comprehensive maintenance of metro city roads. This segment offers good potential.

Weaknesses

The company has limited expertise in handling large road projects from the NHAI. So far the expertise/ experience of the company has been in small to medium size road projects from the NHAI.

On back of integrated operations with RMC and stone quarries as well as operational BOT road project, the company's consolidated operating margin at 14.4% for FY 2009 was better than that of a typical road constructor. This is despite the fact that 29% of the revenue came from low margin trading and waste management business in FY 2009. With increase in competition and expansion of project portfolio, the ability of the company to sustain this going forward has to be seen.

The top five projects account for 61% and the top three projects account for a whopping 47% of its current order book. Given this high concentration, any delay in these five projects could cripple the revenues of the company. About 96% of the current order book is made up of road projects with little exposure to other sectors.

MSP Infrastructures, a group company and promoted by promoters of MBLIL, has objects similar to that of MBLIL. As a result, there could be conflict of interest between MSP Infrastructures and MBLIL.

Two criminal proceedings/cases pertaining to dishonour of cheques were pending against the company in courts.

Valuation

Consolidated income from operation of the company for the fiscal ended March 2009 was up by 75% to Rs 513.64 crore. OPM expanding by 70 bps facilitated an 83% jump in operating profit to Rs 73.93 crore. Net profit was higher by 76% to Rs 27.40 crore. The consolidated EPS for the fiscal ended March 2009 works out to Rs 15.7 on post IPO equity.

At the offer price band of Rs 165-Rs 180, the PE works out to 10.5 times its FY 2009 earnings at lower price band and 11.5 times at the upper price band. In comparison, its peers such as PBA Infrastructure, MSK Projects and KNR Constructions quote at PE of 7.5 times, 9.6 times and 7.5 times, respectively, of their FY 2009 earning. Only J Kumar Infrastructure quotes at a higher PE at 13.7 times of its FY 2009 earning.