The Centre’s increased emphasis on improving road infrastructure lifts the prospects of companies that operate and maintain highways and collect tolls. MEP Infrastructure, a market leader in this segment, is well placed to make the most of this opportunity.

As earlier road projects awarded in the build, operate and transfer (BOT) model mature, these projects are likely to be awarded to players such as MEP Infrastructure.

The increasing tilt towards the engineering, procurement and construction (EPC) format for new road projects also augurs well for the company as the maintenance of the completed roads have to be undertaken by other players.  

 But a bulk of these road maintenance and tolling projects are likely to be available only after FY17. While the company has started turning around in the current fiscal year, resulting in its net worth turning positive, the high debt level is a big concern. A chunk of its operating profit is currently being eroded by the interest payouts.   

The stock price declined from its IPO issue price of ₹63 in May 2015 to ₹37 in March 2016 appears to have factored in these negatives. But given the ongoing turnaround in the company’s performance and strong revenue visibility over the long term, investors can continue to hold the stock.  

Healthy portfolio According to a Crisil report, the operation, maintenance and transfer (OMT) market — for national and State highways put together — is estimated to grow annually by around 25 per cent till 2017-18; growth in the tolling segment is expected to be around 15 per cent. The budgetary allocation to add 10,000 km of national highways this year, predominantly through construction (EPC) contracts, and the additional budgetary allocation by the National Highways Authority of India (NHAI) to improve 50,000 km of State highways in the next couple of years will further increase the market pie for toll and OMT players.

MEP’s revenue contribution from long-term projects rose to 68 per cent for the nine months ending December 2015 from 39 per cent in FY12.

Revision in tolling charges and increase in traffic with improving economic growth will further aid the business.

There is however, a concentration risk as nearly 20 per cent of the topline is derived from the Mumbai entry point project.

There is also the risk of toll collection getting hampered due to change in State government policy. The impact of the Tamil Nadu State Transport Corporation not paying the full toll charges in the Madurai-Kanyakumari highway is, however, not material.

Improving financials

MEP’s revenue grew at an annualised rate of 22.5 per cent between FY12 and FY15. But the revenue growth in the first nine months of FY16 has been flat.

Its operating profit margin however, improved to 30 per cent in the nine months of FY16; this is a revival after consistently decreasing operating margins from 37.5 per cent to 24 per cent between FY12 and FY15.

the company also logged net profit of ₹16.3 crore for the nine months ending December 2015, after consistently recording losses since FY12. The turnaround was largely thanks to improvement in operational efficiency; operating and maintenance expenses dropped 12.4 per cent year-on-year.

Slight reduction in debt with the issue proceeds also pegged down interest costs slightly.  

But MEP’s net debt-to-equity ratio stays very high at 30 times as of December 2015. Interest cover ratio (EBITDA to Interest) is low at 1.56 times.

The high debt is mainly due to the ₹2,100-crore initial payments for the Mumbai entry point project in 2010.

Decreasing interest rates can provide some relief to the company on this front.

Related Topics