Recommendation From Roads & Highways Sector

This column gives you script chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

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MEP Infrastructure Developers

HERE IS WHY
Addition of new revenue line
Effective government policies
Healthy revenue and PAT growth due to new TOT model 

MEP Infrastructure Developers Ltd (MEP), founded in 2002 by its current promoters Dattatray and Jayant Mhaiskar, commenced its operations with toll collection at five entry points to Mumbai for six years. Today, the Mumbai-headquartered company has emerged as one of the leading players in the Hybrid Annuity Model (HAM), Operate, Maintain, Transfer (OMT), Build, Operate, Transfer (BOT) and toll collection space in India. 

The future of road infrastructure industry looks bright with government planning to invest close to Rs25 trillion over the next three years in infrastructure. The National Highways Authority of India plans to add around 50,000 km road over the next five to six years. 

Given the significant market share of MEP in the HAM space and the fact that NHAI is expected to award 80 per cent road projects through the EPC or HAM routes, we can expect attractive opportunities for MEP in this space in the coming years. Also, Toll, Operate, Transfer (TOT) projects provide opportunity as government plans to invite bids for projects worth Rs55,000 - 60,000 crore in near term. 

FINANCIALS : In FY17, MEP's 48.9 per cent of the revenues came from OMT projects, followed by 37.5 per cent from short-term toll collection and 9.9 per cent from long-term toll collection. Its EPC projects generated 3.3 per cent revenue. MEP has posted 13 per cent CAGR in revenue over FY14-17. In FY17, MEP’s revenues declined 9.2 per cent to Rs1729.07 crore from Rs1905.19 crore in FY16 due to the completion of RIDCOR, Kini-Tasawade project and handing over of the Chennai and Madurai Kanyakumari projects to the authority. Its EBIDTA also decreased from Rs1606.49 crore to Rs1533.03 crore, due to a corresponding reduction in turnover and higher operating and maintenance costs. The company reported a PAT of Rs108.93 crore improving to 6.3 per cent in FY17 from -1.9 per cent in FY16 due to a reduction in finance costs. Its finance costs reduced to Rs493.1 crore in FY17 from Rs642.2 crore in FY16. 

For Q1FY18, MEP’s consolidated revenue came in at Rs380 crore, registering 17.6 per cent YoY decline. Its EBITDA for the quarter fell 48.4 per cent YoY to Rs181 crore with a corresponding margin contraction of 2842 bps. The EBITDA margin for the quarter stood at 47.7 per cent. The margin contraction was mainly led by sharp jump in operating & maintenance expenses, up by 115 per cent YoY. The company's PAT for the quarter came in at Rs13 crore with YoY decline of 61.4 per cent. 

On the valuation front, the share price of MEP Infrastructure Developers Ltd is currently trading at PE ratio of 20.09x as compared to industry PE multiple of 27.15x. The company’s ROE and ROCE stood at 0.94 per cent and 1.45 per cent, respectively, in FY17. 

We expect new HAM orders to add new revenue line. Also, effective government policies and new TOT model will lead to healthy revenues and PAT growth in the coming years. We recommend our reader-investor to BUY the stock.