Madhucon Projects Ltd INITIATING COVERAGE

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1 Madhucon Projects Ltd INITIATING COVERAGE Industry Mr. VAIKUNTNATHAN Director MADHUCON PROJECTS LTD. (O) Stock metrics Bloomberg code Reuters code BSE Group MDPHJ IN MAPR.BO BSE Code NSE Code MADHUCON Face Value Rs 1 ISIN NO Market Data S INE378D01032 Market Cap (Rs Cr) WeekHigh/Low /36.23 Sensex Nifty Average volume Shareholding Pattern : Indian Promoters Other investors 25% Shareholding Pattern (%) 11% 7% Non Promoter(Institution) General Public Research Analyst Divya Kant igslresearch@inventuregrowth.com Denil Savla May 5 th 2010 Infrastructure 57% 1 I N V E N T U R E. Current Price Rs.158 Potential Upside 52.32% Target Price Rs Time Frame 24 Months Madhucon Projects Ltd. - Power to boost growth Madhucon Projects Limited is engaged in execution of infrastructure projects, such as construction of national highways, fly-over, dams, tunnels, aqueducts, bridges, coal handling plants, workshops, property development projects, including high rise structures, hospitality and retail industry structures. Madhucon s order book remains to be healthy with Rs 4140crs (as on March 2010) which is bifurcated between EPC, BOT Projects. The Company expects its other BOT Road projects are completed in FY11. We remain positive on the fundamentals of the company going forward. Valuation We expect the revenue & net profit to grow at the CAGR of 28% & 77% for the period from FY10 to FY12E. We have valued the company on SOTP valuation basis. DCF Valuation of BOT projects aggregates to Rs 72.17/shares while the Power contributes nearly at Rs 17.33/share.Construction, real estate and mining business sums up the fair value at Rs /share. The SOTP of the complete valuation of the MAPR comes at Rs / share with an upside of 52.32%. We initiate coverage on Madhucon Projects Ltd. with a BUY rating with huge order book backup. Year Ended March F Y 09 F Y 10E F Y 11E F Y 12E Net Sales (Rs.Crs) growth (%) EBIDTA (Rs.Crs) growth (%) PBT (Rs.Crs) growth (%) Net Profit (Rs.Crs) growth (%) EBIDTA Margins (%) Net Profit Margins (%) EPS PE Source: - IGSL Research

2 TABLE OF CONTENT Table of Contents Page No. Investment Thesis 3 Subsidiaries Road Ahead... 5 Other Business Overview... 6 Industry Outlook 7 Risk and concerns 8 Valuation and Recommendation 9 Target Price Derivation. 12 Peer Set Comparisons 13 Financial Charts. 14 Profit & Loss A/C Analysis 15 Balance Sheet Analysis 15 Cash Flow Statement 16 Ratio Analysis 17 Quarterly Analysis 18 2

3 Investment Thesis I N V E N T U R E. Highw ays 20% Real estate 10% Mining 6% Pow er 30% Irrigation 34% Irrigation Pow er Highw ays Mining Real estate 1 st phase of 300 MW to complete in Q4FY11. BOT Road projects construction to be completed in FY11 and revenue expected is Rs Lakhs per day. Hotel s financial closure has been done; project is expected to be completed soon. Robust Order book Madhucon Projects has reported a robust growth in order book this year. Its order book in March-2010 stood at Rs.4140 crores which is 4 times of the revenue of FY09. The order book boasts of orders from power, highway and mining. Over the next two years growth in order book is expected to be around 20%. Madhucon s Power Projects Madhucon Projects Ltd. expects 1 st phase of their ambitious thermal power plant based in Krishnapatnam in Nellore District of Andhra Pradesh to be completed in Q4FY11. Financial closure of 2 nd project is under way. This project is commissioned under fully owned subsidiary Simhapuri Energy Private Limited. 70% of Power produced will be supplied to PTC and remaining will be supplied to grid. Madhucon projects has bagged THREE hydro power projects in Uttarakhand to produce 25MWx3 i.e. 75MW extendable up to 100MW. The project has been assigned for 35 years. Financial closure is expected to be done in FY11. BOT Toll Road Projects and Highways Madhucon projects have FOUR BOT toll road projects out of which revenue collection has commenced on two projects in May 2009 and September 2009 respectively. The remaining two projects are expected to be completed by Q2FY11. Revenue is to be around Rs.55-60Lakhs per day when all four BOT projects are complete. Construction of other three major highway projects are in full swing, projects are expected to be commissioned till After successful completion of these projects Company looks forward to other BOT projects. The Real Estate business Madhucon heights, NAMA Hotels, Madhucon Mega mall are the major real estate units. Financial closure of NAMA Hotel has been done and the project is expected to be complete in Q2FY12. The four-star hotel is stretched over ~5 acres in Kukatpally, Hyderabad. The land was bought in December 2005 at an average cost of Rs4.5Crs an acre. The company plans to construct 330 rooms and about 72 service apartments at the estimated cost of Rs360Crs. 3

4 Madhucon recently won 2 nd license in Sumatra, Indonesia.. Madhucon Infrastructure expected to raise Rs.600 Crores. Power project along with other key projects will drive margins. Mining business to be shining soon Madhucon Subsidiary PT Madhucon Indonesia has recently bagged second order for mining ha in Sumatra. Legal formalities and environmental licenses will take some time and commercial production is expected to commence in next 3-4 Yrs. This mine is expected to hold reserves around 250 million tons. The first mine at South Sumatra is spread across 10,000 ha and has capacity of 900-1,000mn tons of coal reserves. It is expected that company will be able to extract 1.5 million tonnes in FY11.and for the same company has installed a crusher with capacity of 1000 Ton per Hour. The expected cost to mine a million tonnes is around Rs.110Crs. IPO for Madhucon Infrastructure in FY11 The management plans to transfer projects including four toll roads, power and coal mines in Indonesia. The company intends to unlock shareholder value and consequently realize fair valuations for its operational infra assets with listing of the 100% subsidiary. Amount expected to be raised is around Rs.600Crores. This restructuring is to be seen. Completion of projects to drive margins Margins are expected to grow with the completion of projects. BOT road projects will get completed in Q2FY11 and this will give a tremendous boost to revenue. But the key project of power that is expected to complete in Q4FY11 will help further to boost margins in FY12. EBITDA margins will be around 13.8% and PAT is to report growth around 66.83%. There are EPC projects also which will get completed in coming years. With strong order book it seems that Madhucon has a strong hold in future. 4

5 Subsidiaries Road Ahead MAJEL Project has been completed and revenue is expected to be Rs. 8.5Lakhs per day. TN (DK) has commenced its revenue operation since Q3FY10 and revenue is expected to be Rs.6.5-Rs.7Lakhs per day TTEL and MTEL are expected to be completed in Q2FY11 and revenue from all the four BOT road projects is expected to be Rs.55-60Lakhs per day. Madhucon Agra Jaipur Expressway Ltd. Madhucon Agra Jaipur Expressways Limited was initiated in March 2005 as a Special Purpose Vehicle of Madhucon Projects Limited & Associates - SREI & Associates Consortium for execution and maintenance of Four Lanes of Bharatpur - Mahua Section road project on NH-11 in the state of Rajasthan on Built, Operate and Transfer (BOT) basis. This contract was awarded by National Highways Authority of India. As per the Concession Agreement the Ownership of the project continues to vest with the NHAI. The Concession period comprises of 25 years which includes construction period of 30 months. MPL has a holding of around 85%. The operations on this project were initiated in May Traffic is expected to grow at 8% in FY11 and Toll revenue to grow at WPI. Expected revenue from this project is Rs.8.5Lakhs per day. TN (DK) Expressways Limited TN (DK) Expressways Ltd was incorporated as a SPV of MPL and SREI Consortium for design, construction, development, finance, operation and maintenance on NH-7 in the state of Tamil Nadu. The concession period for the project is of 20 years including construction period of 30 months. The operations on this project were initiated from September Traffic in FY11 is expected to increase by 7% and revenue is expected to be Rs.6.5 to Rs.7 Lakhs per day. Trichy- Thanjavur Expressways Limited Trichy- Thanjavur Expressways Ltd. is full owned subsidiary of MPL for construction and maintenance of road project on NH-67 in the state Tamil Nadu on BOT basis. The concession period is of 20 years and includes construction period of 30 months.the project is expected to be commissioned till Q2 FY11. Revenue is expected to be Rs.7.5Lakhs per day. Madurai Tuticorin Expressways Ltd. Madurai Tuticorin Expressways Limited is a SPV of MPL and SREI & associates consortium for construction of four lane road project on NH-45B in Tamil Nadu on BOT basis. The concession period is of 20 years including construction period of 36 months. This Project is expected to start earnings revenue from Q3 FY11.Revenue is expected to be Rs.9Lakhs per day. 5

6 Other Business Overview Other Highway projects MPL has other major highway projects which are expected to be completed till Q Projects are expected to complete in FY11. As mining production from 1 st unit in Indonesia has initiated, expected production of coal is 1.5 million tones in st phase of thermal power project is slated to complete in FY2011 and with other new power projects in its kitty, it is a sector to watch out for Madhucon Name of the Total Cost Completion Project Date Nagaon to Dharamtul Rs Crs Q Jhanjapur to Dharbanga Rs.340 Crs. Q Mehsi to Kotwah Rs.239Crs Q Source: NHAI PT Madhucon Indonesia This is a fully owned subsidiary of Madhucon and it is into coal mining. Madhucon received its second mining license in Feb 2010 the earlier one was in The production capacity is of 10000ha and mining is expected to start in the FY2011. The cost expected for mining 100 million tonnes is expected to be Rs.125Crores out of which Rs.90Crores being invested so far. The mine is expected to produce around 50,000 tonnes. Around 35-40% of the coal will be imported for its captive requirements within the group for generation of thermal power. Madhucon recently won a second mining license of 30970ha in Sumatra from which production is expected to start in next four years. Company still awaits licenses from environment authorities and other respective authorities. Simhapuri Energy Private Ltd Madhucon is aggressively working towards its ambitious project of generating around 1920 MW of thermal power this power plant is based Krishnapatnam in Nellore District of Andhra Pradesh. The plant is slated to be completed in four phases with the first two phases being 300MW each. It holds 90% equity stake in SPV. The SPV has already secured all necessary clearance from the authorities. The first phase of power generation is expected to complete in Q4FY11 for 300 MW. The PPA and coal linkages for only 50% of the capacity have been tied up with PTC; the company plans to sell the remaining capacity on a merchant basis. The financial closure for second phase of 300MW has been completed and project is expected to be commissioned by Q3FY13. Apart from that MPL has been awarded 3 hydro- power projects in Uttarakhand for 25MW each. The projects are on concession period for 30 years. 6

7 With budgetary allocation and thrust for world class infrastructure, Govt. of India is keen on building amenities. Indian Road Network Industry Outlook Indian Road Industry Improving connectivity development of secondary and tertiary roads can open up hitherto unconnected regions to trade and investment and step up access to goods, services and employment opportunities and this is something India is heading towards. The country s road network consists of national highways, state highways, major district roads, other district roads and village roads. India has the world's second largest road network, aggregating over 3.34mn kilometers (km). 14% 4% 2% 0.1% Expressways State Highways Rural & other Roads Source: NHAI 80% National Highways Majors District Roads Growth Potential of Indian Road Union Budget reiterated the commitment of the Government of India on accelerated development of Infrastructure in the country. In this budget government provided Rs crores, for infrastructure development which translates into over 46% of the total plan allocation. The allocation made for road transport has been increased by over 13% from Rs17520 crores to Rs19894 crores. The allocation for urban development has been increased by more than 75% to Rs5400 crores in Similarly the allocation for housing and urban poverty alleviation rose from Rs850 to Rs1000 crores in Recently Awarded projects Uttarakhand based 75 MW (3X25MW) projects extendable up to 100MW. Mining of 30790ha in Sumatra, Indonesia. Construction of Road in Nepal worth Rs.160 Crs. EPC contract worth Rs 1,198 crores for setting up thermal power plant near Krishnapatnam in Nellore district of Andhra Pradesh. The budget s commitment on the plan of government to construct 20 km of road a day is to throw more opportunities for infrastructure developers. Government has allowed resale of specified machinery imported (under 0% import duty) for road construction before 5 years on payment of import duty at depreciated value or relocation of such machinery to other eligible projects will avoid idling of machines and duplication of investment in imported machines. 7

8 Risk & Concerns There are risks in every business but if management is willing to counterpart challenges, company can thrust for growth.. Economic Slowdown: - There is a significant risk in the traffic growth due to the slowdown of the economy. Also the ability to raise the toll revenue beyond detrain point because of the government intervention. Price Escalation: - Any price escalation in the cost of and/or scarcity in availability of key equipments, material cost may affect the performance. Projects Delays: Delays in completion of contracts with contract schedules could have a material adverse effect on Madhucon s cash flow, revenues and earnings. Interest Rate Risk: - The interest rate of most of the projects under the execution are linked to the benchmark rates & reset at Periodic interval. Poor Traffic Growth: Traffic is one of the basic parameters affecting the viability of road projects. The ongoing economic slowdown, inflation and a rise in fuel price could adversely affect traffic growth. Regulatory Risk: The Company s success depends on support from the authorities and the government; and resolving any issues regarding regulatory changes. Otherwise any issue can create unwanted delay. 8

9 Valuation and Recommendation BOT Toll Road Valuation This project was initiated in Year 2005 and commissioned in May The revenue from this project is expected Rs.8.5 Lakhs per day. Company is expecting traffic growth of 7% yearly and toll charges to grow at WPI. This project helps company to mark its presence in North India, and will help company fetch other PAN India BOT projects. MAJEL BOT PROJECT Agreement Period Concession Period 25 Yrs. Total Cost 3380 NHAI Grant 384 Total Debt Total Equity Growth in Toll Charges 8% Growth in traffic 7% Net Present Value NPV/ Share This Project is based in Tamil Nadu on NH-7 (Dindigul-Karur). Revenue is expected to be around Rs.7.5 Lakhs per day. Construction period was for 30 months. Madhucon projects hold 90% stake in this project. Project was completed in September TNDK BOT PROJECT Agreement Period Concession Period 20 Yrs. Total Cost 3733 NHAI Grant 672 Total Debt Total Equity Growth in Toll Charges 8% Growth in traffic 8% Net Present Value NPV/ Share

10 This project is again Tamil Nadu based on NH-67(Thrichy- Thanjavur section). The project is slated to be completed in Q2FY11.Revenue expected from this project is Rs.8.5 Lakhs per day. This is Madhucon s fully owned subsidiary. TTEL BOT PROJECT Agreement Period Concession Period 20 Yrs. Total Cost 3900 NHAI Grant Total Debt Total Equity Growth in Toll Charges 8% Growth in traffic 10% Net Present Value NPV/ Share This BOT project was awarded by Tamil Nadu government. Construction period is for 36 months. Revenue expected from this project is around Rs.10.8 Lakhs per day. Amongst other BOT projects this one is the largest covering 128 Kms and cost of this project is Rs.9200 Crs. This project is slated to complete in Q3FY11. MTEL BOT PROJECT Agreement Period Concession Period 20 Yrs. Total Cost 9200 NHAI Grant 812 Total Debt 6948 Total Equity 1440 Growth in Toll Charges 8% Growth in traffic 10% Net Present Value NPV/ Share

11 In this we have assumed that 53.8 T/hr of coal is used for an output of 100 MW. The cost of coal is assumed to be $45 and cost per unit is Rs Therefore total cost for producing 300MW will be Rs.3.2 Crs. The unit is expected to be 60% efficient henceforth the total cost for production will be Rs Crs. PPA and coal linkages for 70% of the capacity is tied with PTC and remaining on the merchant basis and revenue from that is expected to be Rs Crs. Therefore PAT is to be around Rs Crs. EBITDA Margins are around 24.15% Profit & Loss a/c for Power Particulars FY12E Net Sales O&M Cost EBITDA Interest 84 PBT Tax 3.55 PAT Rs Crs. 11

12 Price target Derivation We have used sum of parts (SOTP) approach, given the diverse nature of business. We have used DCF model for calculation of Road based BOT projects. An impressive order book of Rs.4140 Crs which is expected to rise in FY11 to Rs.6000 Crs. Madhucon is focusing mainly on power projects and they are keen on undertaking projects in power sector. We have segregated the power business and as the 300MW project is expected to accomplish in Q4FY11. Construction, Real estate & mining business has been placed together in terms of earnings because these businesses will take some years to show revenue independently. PAT in FY12E is reported to Rs.135 Crs. of which we expect Rs Crs as PAT from power. We expect a positive upside of 52.32% to Rs /-. Valuation Overview BOT Projects NPV/Share MAJEL TNDK MTEL TTJK Total from BOT Projects Revenue expected from: Construction, Real Estate & Mining No. of shares 7.4 EPS Assigned PE 10 Total Valuation Revenue from Power No. of shares 7.4 EPS Assigned PE 10 Total valuation SOTP( )

13 Peer Set Comparisons Rs. Crs. Peer Group IVRCL Infra. Madhucon Proj. Patel Engg. Punj Lloyd Simplex Infra NET SALES TOTAL EXPENDITURE ADJUSTED NET PROFIT EARNINGS PER SHARE BOOK VALUE-UNIT CURR SHARE CAPITAL TOTAL SHAREHOLDERS FUNDS TOTAL DEBT / LOAN FUNDS NET CURRENT ASSETS PBIDTM (%) PBITM (%) PATM (%) P e r c e n ta g e Peer Group Margins IVRCL Madhucon Patel Engg. Punj Lloyd Simplex Infra. Proj. Infra PBIDTM (%) PBITM (%) PATM (%) With BOT road projects coming into play and power projects also on the verge of completion it seems that Madhucon Projects Ltd. will outperform its peers in years to come.. 13

14 Revenue trend Revenue Chart Sales are expected to increase in FY12 to 2130 Crs (Crs.) FY09 FY10E FY11E FY12E Yrs. Revenue and EBITDA Net Revenues EBITDA MARGIN EBITDA margins have increased in with the increase in sales.. (Rs Crores) FY09 FY10E FY11E FY12E (%) Margins Margins With cost of production also increasing therefore there has been marginal increase in PAT. (%) FY09 FY10E FY11E FY12E Yrs. EBITDA MARGIN PAT MARGIN EBIT MARGIN 14

15 Profit and Loss Statement Rs. Crs. Particulars FY08 FY09 FY10E FY11E FY12E Gross Revenues Add: Other income Net Revenues % Growth Expenditure EBITDA EBITDA Margin Less: Depreciation & Amortization EBIT Less: Interest Expenses EBIT Margin PBT Less: Taxes Adjusted PAT Add/less Extraordinary items Reported PAT PAT Margin Balance sheet statement Rs. Crs Balance Sheet Statement FY08 FY09 FY10E FY11E FY12E Share Capital Reserves and surplus Borrowings Deferred Tax Liability Total Liabilities Gross Block Less: Depreciation Net block Add: Capital work in progress Investments Net Working Capital Total Assets

16 Cash Flow Statement Rs.Crs. Cash Flow Statement FY08 FY09 FY10E FY11E FY12E Opening Balance for cash Cash Flow From Operating Activities Net Profit before Tax & Extraordinary Items Add: Depreciation Add: Interest (Net) Less: Income from Investment and others Operating profit before working capital changes Changes in WC Cash Generated from operations Direct taxes Net Cash flow from operating activities (A) Net cash used in investing activities (B) Net cash used in financing activities (C) Net increase in Cash and Equivalent (A+B+C) Closing balance at the end of year

17 Ratio Analysis Valuation ratios FY08 FY09 FY10E FY11E FY12E Price Earning (P/E) Price to Book Value ( P/BV) Price/Cash EPS (P/CEPS) EV/EBIDTA Market Cap/Sales Revenue Growth (%) Other Key Ratios EBIDTA (%) PBIT (%) PAT (%) EPS Debt/Equity

18 Quarterly Analysis Statement Q4 FY10 Q4FY09 VAR [%] Q3 FY10 Q3FY09 VAR [%] Net Sales Total Expenditure PBIDT PBIDT(M)% Interest PBDT PBDT(M)% Depreciation Other Income PBT PBT(M)% Total TAX PAT PAT(M)% Extra-ordinary Items Adj. PAT Q4 FY10 Quarter Performance Analysis Madhucon has posted a performance driven record in quarter ended in March 10 with a robust top line growth of 85.55% to Rs Crs in Q4FY10 as against Rs Crs in Q4FY09. Company mainly concentrated on project execution. EBITDA Margins for the Quarter declined to 6.35 in Q4FY10 by 30.87% as compared to Q4FY09. As the company has changed its revenues mix for Power, which earns relatively lower margins in current year. PAT Margins for quarter declined by 73.90% in Q4FY10. 18

19 For any queries please feel free to contact our Institutional Research Team Names Designation Id. Contact Number Nagji Rita CMD - - SALES Ravinder Kasliwal Head Institutional Sales ravinder.kasliwal@inveturegrowth.com /66 Dealing Vinit Rita Institutional Dealer vinit.rita@inventuregrowth.com /66 Rashda Ainapore Institutional Dealer rashda.ainapore@inventuregrowth.com /66 Puja Shah Institutional Dealer puja.shah@inventuregrowth.com /66 Research Denil Savla Research Analyst denil.savla@inventuregrowth.com * 581 Sheetal Nirmal Research Analyst sheetal.nirmal@inventuregorwth.com * 628 Pankti Shah Research Analyst pankti.shah@inventuregrowth.com * 583 Divya Kant Research Analyst divya.kant@inventuregrowth.com * 582 Anshuman Jain Research Analyst anshuman.jain@inventuregrowth.com * 579 Sanjeev Haria Research Analyst sanjeev.haria@inventuregrowth.com Sibayan Banerjee Technical Analyst sibayan.banerjee@inventuregrowth.com Ashok Patel Technical Analyst ashok.patel@inventuregrowth.com Madhu Patel Technical Analyst madhu.patel@inventuregrowth.com Disclaimer This Document has been prepared by Inventure Growth & Securities Ltd. The information, analysis and estimates contained herein are based on Inventure s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This document is for circulation only Visit us at Please send your Feed Back to igslresearch@inventuregrowth.com Inventure Growth & Securities Ltd Corporate Office: - Viraj Tower, 2 nd Floor, Near Landmark, Western Express Highway, Andheri East, Mumbai Tel.: , Fax: