MBL Infrastructures Limited (MBL) is tapping the capital markets to raise funds for buying capital equipments and funding working capital requirements. The issue is currently on and closes on Tuesday the 1st of December 2009.

MBL is in the business of highway Construction and road maintenance. They have historically been in the business of waste management for steel mills which is a low margin business but has been contributing between one fourth and one third of the companies’ turnover. In 2009 of the total turnover of Rs 514.46 crs, as much as Rs 148.90 crs came from waste management, while in the first quarter out of a total of Rs 151.88 crs, waste management contributed Rs 37.71 crs. The company has executed projects or is executing projects in about 13 states.

Order book
As of 30th June 2009 the order book of the company was Rs 585.12 crs on its own account and share of orders from JV was Rs 286.99 crs making a total of Rs 872.11 crs. Of the above the unexecuted portion as of 30th June was 612.46 crs. The company has also been awarded contracts to the tune of Rs 202.81 crs after 30th June making a total of Rs 1094.92 crs. These projects would by and large be completed in the next 18 months or so.

BOT project
The company has executed and completed a BOT project through its subsidiary M/s AAP Infrastructure Limited. This project is a 114 km road between Seoni-Balaghat on State Highway 26 and Balaghat- Rajegaon on SH 11. The scope of work included reconstruction, strengthen, widen and rehabilitate the concerned stretches of road. The work has been completed and toll charges are being collected. The concession period is upto March 2021 and includes a fixed toll escalation of 7% per annum. The current toll collections average about Rs 65-70 lakhs per month or about Rs Rs 8 crs per annum. The financials of this company are included in the consolidated results discussed earlier in the article.

Objects of the Issue

The company has been sanctioned term loans of Rs 10 crs.

IPO Grading
The company had attempted to approach the capital markets earlier and had filed in October 2006 a DRHP with SEBI. The issue was graded by CRISIL who had given a rating of 1/5 indicating poor fundamentals. As per the report published in the RHP, the company was looking to issue 60 lakh shares at a price of Rs 100 at that time. It also mentions “The grading is also influenced by the fact that the management has been a late mover in tapping opportunities in the construction segment”
The current IPO grading is from ICRA who has given the company a grading of 2/5, indicating below average fundamentals. The grading report mentions “Given the significant concentration of road projects in MBL’s current order book (98% of its current order book is accounted for by road projects), its ability to face competitive pressures in this segment or successfully diversify into other segments will remain crucial to maintain its future profitability”.
Looking at the above and the order book it is very clear that the company has failed to diversify from road and road related activities.

Strengths
The company bids for projects of NHAI and select state projects funded by World Bank or ADB which ensures timely payment. The company owns a large fleet of construction equipment and is currently executing 15-17 projects at different sites, indicating its project execution capabilities.

Weaknesses and risks
The company has various matters under litigation against the company, its subsidiary and its group company. There are matters pending before the income tax which include cases of Undisclosed Income. The dilution by the promoters is significant and the equity is increasing from 11.61 crs to 17.51 crs.
The company is paying very heavy interest charges and as a result its margins are poor compared to its peers. In 2009 it has paid a sum of Rs 28.02 crs or 37.6% of its Ebidta as interest. The situation has not improved in the first quarter of 2009-2010 with an interest payment of Rs 8.64 crs or 36.8% of the Ebitda. This high payment of interest results in a significantly lower PAT margin compared to its peers. The company has compared itself with J Kumar, KNR, MSK and PBA and is expensive compared to all of them.

Valuations
The company based on March 09 results had an earnings of Rs 23.19 based on the old capital. If one were to dilute the equity to post the issue, the same earnings would stand changed to Rs 15.65. The present offer would then be at a PE multiple of 10.54 times at the lower price band and 11.50 times at the upper price band. If however one were to base this on the first quarter results and annualised the same the EPS would improve to Rs 19.65 making the PE lower at 8.39 and 9.16 times respectively.

Conclusion
The road construction business is a very competitive business and has many players in the segment. The name of the game is size and MBL does not have the same. It has made a token entry into the BOT space and is already paying very high amount as interest charges. The valuation also is not cheap. With plenty of choice available in respect of alternate players, businesses and large number of IPO’s I suggest giving this the slip and waiting for the next bunch of IPO’s which are coming up in the following week. We have a real estate player, a power generating company and a newspaper house all coming public next week.

Simply avoid and wait for better opportunities.

SEBI Disclaimer:- I do not intend to subscribe to this issue