A rough road

MBL Infrastructures’ small size and concentrated order book outweigh the opportunities in the sector and make the stiffly priced offer unattractive.

There are no doubts about the enormous opportunities in the infrastructure space, especially in the road segment. However, for the smaller players there are numerous challenges as well, in terms of competition from larger players, execution risks, size of balance sheet and high capital requirement. MBL Infrastructures is one such small company primarily operating in the road segment. The company undertakes small projects for maintenance, repair, and construction and widening of roads and highways.

Low visibility, high concentration
Considering that the company largely undertakes smaller projects and those related to maintenance of roads, most of its projects are of shorter duration of about 6-15 months and hence, provides relatively low revenue visibility. Its current order book of Rs 762 crore is just 2.1 times its 2008-09 construction revenues. Also, the top three orders account for about 50 per cent of the current order book and about 98 per cent of the total orders is accounted by the road segment, which exposes MBL to several risks.
 

EXPENSIVE PROPOSITION
Company	Order Backlog  (Rs cr)	Order Book/   Sales (x)	Adj. PE (x) FY10E
Madhucon Projects	4,600	3.8	9.3
Sadbhav Engg.	5,144	3.8	11.4
J Kumar Infra	1,475	2	6.2
Pratibha Ind	2,888	2.6	9.1
KNR Constructions	1,000	1.2	4.7
MBL Infra (@ Rs 180)	800	1.5	9
Source: Angel Broking

 

Exiting non-core business
Out of the total revenues of Rs 514 crore the company generated in 2008-09, Rs 148.9 crore or 29 per cent accrued from steel trading (among its original businesses) and waste management. The company hopes to gradually exit these businesses by the end of 2010-11, which should have some impact on its revenue growth. The impact on net profits will, however, not be much given that these businesses enjoy low operating profit margins of about 1.32 per cent.

Aiming higher, but challenges ahead
So far, the company has grown at a fast pace on the back of the opportunities in the road sector, especially in the repairs and maintenance segments. Between 2004-05 and 2008-09, the company's revenues and net profits grew at a compounded annual growth rate of 37 per cent and 43 per cent, respectively.
 

ISSUE DETAILS
Price band (Rs)	165-180
Size (Rs cr)	94-102.6
Opened on	40,144
Closes on	Dec, 01
ICRA rating	39,849

However, from here on, to sustain growth rates and emerge as a bigger company, MBL will need to scale up its business and secure larger projects. The company plans to raise Rs 102 crore (assuming higher price band of Rs 180) through the IPO, which will be used for procuring capital equipments and for funding working capital requirement. This should enable the company to bid for larger projects as against the current average size of projects at Rs 60-65 crore. Post IPO, the company's net worth will increase to about Rs 200 crore, which should allow it to undertake projects worth Rs 600 crore. The company's investment in equipments should help it to improve its margins further. The company has already invested about Rs 87 crore in equipments, which take care of most of its internal equipment requirements. This along with its own ready-mix concrete units, the company's construction business enjoys higher EBDIT margins of 19.65 per cent.

The company will now focus on large cash contracts and maintenance projects. It will also focus on BOT projects selectively. MBL has already completed one BOT road project of 114 km (in the year 2008) marking its entry into this segment. So far, the opportunities in the road segment are enormous and several projects are already announced while others are in the pipeline. However, the benefits are mainly accruing to the bigger players or the companies who have experience and a strong balance sheet.
 

LOW ON REVENUE VISIBILITY
in Rs crore	FY08	FY09	Q1FY10
Total revenue	295	513.9	150.9
Construction rev.	197	365	113.19
Trading & waste mgt	97	148.9	37.71
Order book	472	482	762*
Order book/ Sales	2	0.93	NA
EBIDTA	40.9	74.5	23.5
EBIDTA margin (%)	13.9	14.5	15.6
Net profit	15.56	27.4	8.6
* As on date

MBL's biggest challenge would be to win as well as execute such large projects given the competitive environment where a lot of small and large companies are already present. Additionally, many of these companies have diversified revenue streams, at least to some extent, within the infrastructure space, which enables them to maintain growth in order book and de-risk their business model. However, in the case of MBL Infrastructures, the company is solely dependent on the road segment for growth and income.

Conclusion
ICRA has graded the IPO at 2 on the scale of 5 indicating below average fundamentals on the grounds of lack of diversification, concentration of few orders in total order book, high contribution from low margin trading business, challenges pertaining to execution of large projects and competition from other companies.

On the other hand, analysts too are not comfortable with the IPO pricing (valuations). The company has reported a net profit of Rs 8.6 crore for June 2009 quarter, translating into an annualised profit of about Rs 34 crore (25 per cent higher compared to 2008-09) and EPS of Rs 19.5 for 2009-10 based on post-issue capital. On the basis of 2009-10 EPS, the price to earnings multiple works out to 9.2 times on the upper price band of Rs 180 per share. This is higher as compared to some of the listed peers who are not only bigger as compared to MBL, but they also have a larger order book and enjoy higher revenue visibility. Investors should skip this offer.