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Madhucon Projects – Investment Recommendation – Motilal Oswal

January 18, 2007

Motilal Oswal has initiated coverage on Madhucon Projects with a BUY rating and a Target price of RS 387. CMP Rs 311.

Madhucon is mainly into infrastructure projects and is likely to be a major beneficiary of huge spending in Roads and Irrigation projects. The road sector is likely to see an investment of Rs2,200b through FY2012. Further, the Andhra Pradesh (AP) government will spend Rs260b on irrigation projects through FY2010. Madhucon will be a major beneficiary of this, given its timely completion of more than 350km of Golden Quadrilateral and proven ability in irrigation projects.

Healthy Margins: Madhucon’s margins are superior to its peers. Madhucon’s 14% TTM EBITDA margin is above the average peer group margin of 10%. The main reasons for Madhucon’s superior margins are: (1) big-ticket orders enabling overhead efficiencies, (2) own mines for aggregates (25% of road project cost), and (3) sub-contracting of only low-value activities. Madhucon will maintain at least 13% EBITDA margin going forward.

Order Books: Madhucon has a strong revenue visibility with an order book of about Rs42.9b (10x TTM revenue) – 68% road projects (both direct and BOT), 25% irrigation projects, and balance real estate and railway projects. Only 65% execution through FY 2009E may happen, implying potential upside.

Motilal Oswal expects an EPS os Rs 11.9, Rs 19.9 and Rs 31.9 on sales of Rs 547 crore, Rs 985 crore and Rs 1477 crore for Fy07, 08 and 09 respectively.

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