MBL Infrastructures

Investors with a high-risk appetite and with a two-three year perspective may add the stock of construction contractor MBL Infrastructures.

At Rs 273, the stock is 11 times its trailing four-quarter earnings and 9 times estimated FY11 earnings. Peers such as KNR Constructions and PBA Infrastructure trade at similar valuations. Backward integration leading to strong operating profit margins, a healthy order book, secure client base, graduation to a road developer and wide geographic presence bode well for this construction contractor.



Segment presence

MBL is a construction contractor, primarily in the roads segment. Apart from construction, MBL offers road maintenance, which could be a lucrative segment as the developed road network increases and turns operational.

While a concentrated presence in roads does heighten risks, a good portion of MBL's projects are from the municipal and Public Works Departments of various States (such as Haryana and Uttrakhand), Mumbai, and so on. A clientele such as this offers good scope for repeat orders. Projects are also funded by larger, reputed institutions such as the Asian Development Bank.

Besides, it has a presence in the rather lesser penetrated regions of the north-east, especially Assam. As these regions typically have tough terrains, there are fewer competitors and, therefore, profitability on the projects is better.

Geographically, MBL has a wide presence in about 14 States. Still, the company also undertakes industrial constructions, from institutions such as SAIL. Plans are afoot to increase its presence in this sector as well as urban infrastructure.

Construction contracts aside, MBL graduated to the level of a developer undertaking projects on a build-operate-transfer basis. It has one operational toll project, with a road length of 114 km, from which it earned Rs 8.1 crore in FY-10. It recently won another BOT project, in consortium with SREI Infrastructure Finance, in Orissa with a concession period of 19 years.

Securing such projects in consortium, besides providing financial qualification, will allow it to gradually scale up enough to qualify for large-sized orders on its own.

Meanwhile, MBL is still in a position to secure construction projects as large road developers look to subcontract their projects.

Order book value stands at Rs 1,500 crore, up from the Rs 815 crore at the end of December 2009. With an average execution period of 24 months, and at 2.4 times the revenues for FY-10, the order book offers medium-term earnings visibility.

MBL had a division which undertook waste and slag management of steel plants, which it discontinued at the close of FY-10 since it made thin margins. Given that the segment also adds little to its capacity in road construction, closing it may allow MBL to focus resources on its core segment.

Backward integration

MBL had raised Rs 100 crore through a public issue early this year, of which about half was utilised to purchase capital equipment. Along with such equipment, MBL has a Ready Mix Concrete division and stone quarries which feed its construction activities. This afforded a degree of control over input costs, resulting in healthy operating profit margins of 15 per cent for FY-10, a level that was maintained for the two previous years as well.

Revenues grew at a three-year compounded annual rate of 55 per cent at the consolidated level to Rs 637 crore, while net profits grew 54 per cent to Rs 37 crore. MBL met its issue objectives of funding working capital, which, having come in the last quarter FY-10, increased the working capital turnover from four to about five-and-a-half months.

Higher interest outgo led to net margins at 6 per cent, well below its operating margins. Net margins have also been maintained at the same levels from FY-08 onwards. Current debt:equity is still at a fairly reasonable 0.9 times, providing scope for further leveraging for future projects..