MBL Infrastructures IPO Review

Investors with a high risk appetite and a two-year perspective can subscribe to the initial public offer of MBL Infrastructures Ltd (MBL), a player in the road segment. A healthy order-book, sound clientele, backward integration and steady margins are key positives for this construction contractor. While MBL does not possess any unique selling proposition, a steady business model, sustained earnings growth combined with attractive valuations buttress this offer. The company small size, competition and concentrated business model remain risks attached to similar businesses.

In the price band of Rs 165-180, the stock is valued at about 5.8 to 6.3 times its expected earnings for FY-10 on an expanded equity base. This valuation places it at a slight discount to similar sized peers such as KNR Construction and Tantia Constructions.

Background

MBL's project portfolio comprises road construction and maintenance contracts. Clientele is primarily made up of the Public Works Department and municipal corporations of various cities and states such as Mumbai, Delhi, Haryana and West Bengal. Projects are also funded by the World Bank and the Asian Development Bank. MBL, thus, has the credibility to secure repeat orders, especially in road maintenance contracts. The client base is likely to ensure a steady stream of contracts as public works is seldom affected by economic slowdown. MBL has also not seen project cancellations or payment delays thus far.

Having used joint ventures in project execution before, MBL plans to use such alliances to boost eligibility to bid for larger-sized build-operate-transfer contracts. It has completed a one-road BOT project. However, it has neither bid for nor won contracts since then. While small companies have ramped up operations to jointly bid and win BOT projects, MBL's current status can be said to be that of a contractor.

Given the competition and presence of large players in the BOT space, it may be challenging for the company to successfully venture into this space. However, even if it does not, we believe that as a contractor, it is positioned to secure ample business opportunities. Apart from local municipal works, the company is likely to get its pie of business from large road developers, which may subcontract the projects bagged by them.

Geographically, the company's projects cover a majority of the north and mark a presence in the south. Unexecuted order book stands at Rs 815.3 crore, about 2.2 times revenues for FY 09. Slated to be completed over a period of 18 - 24 months the order book provides medium-term earnings visibility. MBL has plans to increase contribution from industrial and urban infrastructure, but does not have any definite orders in hand, resulting in a heavy dependence on the road sector posing concentration risk.

About a third of MBL's revenues is sourced from waste management of steel plants such as SAIL. But with an operating margin of merely 1 per cent, it hardly aids overall profitability. This revenue stream is set to cease by the end of the current financial year; such a move could be positive as this business is unlikely to integrate with the primary road business and may act as a drag on resources.

Issue objects

The company plans to raise about Rs 100 crore through this issue. About Rs 55 crore is marked for acquisition of equipment and machinery. Funds raised will also be used to finance working capital.

Equipment ownership, though requiring higher capex in the short term, will ensure timely availability of key equipment, mobility between projects besides helping to reduce costs. MBL also operates its own ready mix concrete and bitumen divisions that serve captive consumption. It takes stone quarries on lease, mines and produces stone aggregates to meet raw material requirement.

It is, perhaps, this backward integration that has resulted in operating profit margin (OPM) jump to 14.5 per cent in FY-09, compared with the 10 per cent levels in FY-06. The profits margin achieved in FY-09 is commendable, given the raw material pressures faced by most infrastructure players. At 15.6 per cent, OPMs have been maintained in the June 09 quarter as well. Price escalation clauses built into most contracts would further protect margins.

Sales growth

MBL clocked health revenue and net profit growth of 46 and 48 per cent respectively, compounded annually over the last three years. The growth, while superior to many other players, comes from a small base. A repeat performance in future years may be a tough task. Further, debt taken to fund working capital, and depreciation on equipment have dented net profit margins. Comfort, though, may be derived from the fact that interest as a percentage of sales has remained around 4 to 5 per cent.

Offer details

The offer is open from November 27 to December 1. Motilal Oswal Investment Advisors is the book running lead manager. Given its risk factors, investors may consider setting target returns and exit the stock on meeting the same.

via BL