A pick-up in road project orders has helped construction company MBL Infrastructures bag two projects in the space of three months. These projects hasten MBL's move up the value chain to develop projects, from being a construction contractor.

With backward integration lending to better margins, steady order flow, and regular construction contracts to boost near-term revenue inflow, MBL Infrastructures is an attractive buy for investors with a two to three year horizon.

At Rs 167, the stock is at a modest four times trailing twelve months earnings per share. Peers such as KNR Constructions trade at similar multiples, but MBL has managed more consistent growth. However, with MBL being a small-cap stock, investors are advised to limit portfolio exposure to it.

Good order inflow

MBL executes contracts for road and industrial constructions. Fresh order inflow in the recently-ended fiscal was over Rs 2,000 crore. Current order book, at Rs 2,636 crore, is more than double that at end-March '11. Order book stands at 2.45 times the annualised revenues for 2011-12 and with an average execution period of 24 months, it offers good medium-term revenue visibility.

MBL is also geographically diversified and has executed projects in tougher terrain such as Bihar and Assam, where competition is also less intense. It plans to move into urban infrastructure and railway projects which could aid better margins. Most projects are funded by institutions such as the Asian Development Bank, which alleviates risk of payment delays.

Scaling up

MBL has one road project as a developer, which has been generating toll revenues. Being a new entrant in the road development field, MBL partnered SREI Infrastructure to win two projects. On the first of these, revenue collection has begun. MBL has two more projects on a solo basis.

Though partnerships may limit revenue flows in the near term, they have many benefits. For one, the company can qualify for much larger projects than in an individual capacity. Two, it limits debt commitment on MBL's part, which will help it maintain a healthier balance-sheet. Three, it helps a gradual build-up on individual bidding capacity. Financial closure has been achieved for all road projects, save one, which was bagged in January this year.

Steady margins

Consolidated revenues have grown at a compounded annual rate of 50 per cent over the past three years to Rs 1,001 crore. Net profits grew 58 per cent to Rs 62 crore in the same period. For the nine months ending December '11, revenues expanded 31 per cent.

However, higher input costs, increase in interest costs and tax outgo led to slower profit growth. Operating profits grew 24 per cent, while net profits grew 8 per cent for the nine months ending December ‘11.

Still, the company kept a control over staff costs and, helped by backward integration, maintained operating margins at 15 per cent. Interest costs, up by 45 per cent are, however, likely to remain high, given the company's projects taken up on a development basis.

Some comfort is derived from operating profits covering interest costs by over three times, better than some peers. Debt-equity is also on the lower side at 1.1 times compared to peers.

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