The Hindu Business Line : Madhucon Projects: Hold

A ramp up in net worth and the recent approval to further expand equity base is likely to place the company in a better position to bid for other BOT projects.

SHAREHOLDERS can retain their holdings in Madhucon Projects, which trades at about Rs 857. Visibility in revenues, expanding margins and foray into Build-Operate-Transfer (BOT) projects are likely to spur earnings growth. The stock trades at 14 times its expected FY-06 earnings. Once the stock begins to trade on an ex-stock split basis (approved in the ratio of five shares of Rs 2 each for every share of Rs 10) it may see enhanced liquidity. We have a buy recommendation outstanding at Rs 90; our view now is tempered by manifold gains over the past year and concerns over near-term performance.

Madhucon Projects saw a dip in its revenue and earnings for the quarter-ended September 2005. Sales and net profits fell 20 per cent on a Y-o-Y basis. The company's revenue took a beating due to delay in clearances for some of the contracts bagged recently. The current order-book of Rs 3,000 crore lends optimism for a 50 per cent growth in revenues for the year ending 2006.

Decline in revenues has not deterred the operating profit margin (OPM) from expanding by 220 basis points to 14.1 per cent in the latest quarter. Madhucon's OPM is among the higher ones in the industry. A few of the recent orders with higher returns are likely to help the company maintain its superiority in terms of OPM.

Highways and irrigation projects dominate Madhucon's orders in hand. Road and irrigation development projects have received priority in both the central and State government's budgets with sufficient fund allocation for the next couple of years; dedicated funding vehicles is also a positive. This is likely to ensure a steady stream of order flow.

While the company has received highway orders in various states, irrigation orders worth Rs 1,600 crore are concentrated in Andhra Pradesh; the State has one of the larger outlay for irrigation work. Madhucon's expertise, coupled with the qualification from current projects, is likely to ensure more orders from other states as well.

Madhucon's plan to widen its reach to other segments is evident from its activity in property development. A joint venture with a Malaysian company has helped the company bag a housing and commercial project in Hyderabad from the Andhra Pradesh Housing Board. An upward movement in property prices, if any, would yield increased returns from the project. Further diversification in the segment may provide momentum to revenue growth.

A ramp up in Madhucon's net worth has resulted in the company bagging the Bharatpur-Mahua (Rajasthan) highway project on a BOT basis.

The recent approval to further expand the equity base through issue of convertible offers in the overseas market is likely to place the company in a better position to bid for other BOT projects. At the macro level, the funding situation has improved further with the Cabinet Committee on Infrastructure clearing the Rs 10,000-crore special purpose vehicle for funding public and public-private projects. Smaller players such as Madhucon are likely to benefit from this funding model.

Madhucon's foray into BOT projects has its risks. Projects with toll-based models have uncertainty in returns.

Unless the company is able to achieve a healthy mix of other models such as subsidy and annuity-based returns, the margins may come under threat. We view the company's diversification into the sugar business through its subsidiary, Madhucon Sugars, as the management does not have experience in this business; this could also soak resources if expansion plans are pursued.

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