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G. Madhan

FRESH exposures can be considered in Madhucon Projects, a Hyderabad-based construction company. The company's robust order book position and its continued focus on road segment augurs well for its earnings growth. The stock, which trades only in the BSE, is hovering at Rs 91 at about two times its per share earnings. The valuation of the stock vis-à-vis its peers is attractive.

Robust order book

The company, at present, has an order book of Rs 540 crore with the completion period of these projects ranging from 12 to 18 months. The company has also pre-qualified for projects totalling Rs 5,000 crore and has bid for projects worth Rs 800 crore. It has also been shortlisted for projects worth Rs 425 crore for which the results are expected in the next two months

Focus on roads

Road projects constitute 70 per cent of Madhucon's order book. There are opportunities in the road sector, as some 85 per cent of the projects in the North-South/East-West corridor are still to be contracted. The company's business is vulnerable to changes in government policy on infrastructure. At present, confidence-inducing factors are the fact that the funding of road projects is already tied up and the assurance given by the new government that it will not dismantle the road projects started by its predecessor.

But with a new government at the helm, investors will have to watch for any dramatic change in the policy. Any tinkering with the mode of funding of roads projects (a sizeable 37 per cent of the funding for the NHDP projects are derived from the cess levied on petrol and diesel) can result in delays in completion which, in turn, could impact the company's earnings. But, then, this risk all construction firms that concentrate on the road segment face.

Irrigation projects, the second largest contributor to the company's revenue, constitute 25 per cent of the order book.

The decision of the Andhra Pradesh Government to accelerate the existing irrigation projects, and increase capital outlay for the sector augurs well for the company's future earnings.

Financial performance

During the FY04 Madhucon's net sales grew by 34 per cent over the previous year.

At the operating level, the profits rose only by 4.4 per cent. Net profits were up 12.2 per cent. The increase in the profits at the net level was due to the sharp drop in interest expenses.

The margins at the operating level fell by 3.7 percentage points to 13.3 per cent. The drop in profits and margins at the operating level may be due to the sharp increase in the cost of key raw materials.

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