Madhucon Projects (MPL) reported broadly in-line numbers for 4QFY2011, though the company surprised on the margin front. MPL’s order book at 3.7x FY2011 revenue provides good revenue visibility. However, we are revising our numbers for FY2012 and FY2013 to factor in the lower top-line growth, lower operating margin and higher interest outgo. Consequently, we downgrade the stock to Accumulate from Buy.
Good performance on all fronts, except interest cost: MPL reported decent
top-line growth of 22.0% yoy to `593.4cr, marginally above our expectations of `578.8cr. OPM stood at 10.6% (6.4%), posting a whopping jump of 420bp yoy against our expectations of a 265bp jump. On the earnings front, the company posted robust growth of 180.0% yoy to `19.3cr against our expectations of a 121.7% jump. Earnings were above our estimates on account of higher margin recovery than anticipated.
Outlook and valuation – Raising of capital is the key catalyst: We believe the key triggers to watch out for MPL should be the pick-up in execution in the development business and building of an attractive asset portfolio to raise money. However, these plans would fructify somewhere in 2HFY2012 only and will be based on the market conditions prevailing then. Hence, we believe till then the stock would be a sector performer and real value would be created only on unlocking at the subsidiary level. Further, increasing debt levels are worrisome signs (FY2011 net D/E – 1.3); hence, value unlocking becomes more pertinent. We are downgrading the stock to Accumulate from Buy due to 1) stretch in working capital; 2) increase in debt levels, which is expected to continue;
3) ~40% of the overall order book that is slow-moving; and 4) consistent delays in commissioning of projects (read Road BOT and Coal). Our revised target price stands at `117/share (`138/share).
Good performance on all fronts, except interest cost: MPL reported decent
top-line growth of 22.0% yoy to `593.4cr, marginally above our expectations of `578.8cr. OPM stood at 10.6% (6.4%), posting a whopping jump of 420bp yoy against our expectations of a 265bp jump. On the earnings front, the company posted robust growth of 180.0% yoy to `19.3cr against our expectations of a 121.7% jump. Earnings were above our estimates on account of higher margin recovery than anticipated.
Outlook and valuation – Raising of capital is the key catalyst: We believe the key triggers to watch out for MPL should be the pick-up in execution in the development business and building of an attractive asset portfolio to raise money. However, these plans would fructify somewhere in 2HFY2012 only and will be based on the market conditions prevailing then. Hence, we believe till then the stock would be a sector performer and real value would be created only on unlocking at the subsidiary level. Further, increasing debt levels are worrisome signs (FY2011 net D/E – 1.3); hence, value unlocking becomes more pertinent. We are downgrading the stock to Accumulate from Buy due to 1) stretch in working capital; 2) increase in debt levels, which is expected to continue;
3) ~40% of the overall order book that is slow-moving; and 4) consistent delays in commissioning of projects (read Road BOT and Coal). Our revised target price stands at `117/share (`138/share).
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