MEP Infrastructure Developers (MEP) is different from other listed players in the road space, operating in the high-promise road maintenance and toll collection. An improvement in earnings is also likely. But the issue is risky due to high debt and tussles with regulators.

The company’s initial public offer for ₹324 crore is now open, at ₹63-65 a share price band. With MEP’s continual net losses, a negative networth and lack of directly comparable peers, conventional valuation metrics don’t apply. Investors can skip the issue, and wait for turnaround to emerge.

A different hue

MEP takes on maintenance and toll collection, or acquires only the right to collect toll in exchange for revenue share or payments to the authorities, on completed road stretches for a set number of years. Roads are those constructed by the NHAI or State highway authorities. In such a model, capital investment and project cost is lower, gestation periods are shorter and payoff quicker, and operating margins higher. But it still does involves risk of traffic flow slowing or falling short of projections.

The operation and maintenance space is a growing one. MEP has a strong advantage with its long track record and expertise in the up-and-coming RFID (radio frequency identification) tolling technology.

It is also focusing on long-term contracts over short-term contracts (one year or less). Short term contracts require frequent winning bids. Revenues have grown at a rapid 40 per cent annually over the past three years to ₹1,197 crore as of March 2014, in part due to a low base.

Despite the asset-light model, MEP’s debt is high at ₹3,021 crore as at October 2014. This is primarily due to the upfront payment of ₹2,100 crore made to the Maharashtra State road development authorities for a maintenance and toll collection project for five entry points, its biggest one.

Risks

Over the past four years, interest costs accounted for around 30 per cent of revenues impacting the operating margins of 30 per cent, sending it into losses. Operating margins too fluctuate depending on revenue-sharing agreements or payment obligations to authorities for each project. .

With mounting losses, networth has been negative from the 2012 fiscal onwards. The company has at times been late in meeting its debt obligations.

Issue proceeds to the tune of ₹262 crore will be used to repay part of this loan, which can save at least ₹30 crore in annual payments. The company may receive ₹126 crore from the NHAI over issues in its project in Chennai which may be used to reduce debt. A declining interest rate can trim interest outgo. But finance costs will remain a drag, especially if the company wins more projects involving upfront payments.

Litigations MEP is also involved in litigations with various authorities. It is trying to get one project terminated due to delays on NHAI’s part in handing over land, on which it may incur losses. It is fighting penalties levied on it by the NHAI on a couple of other projects. Whether MEP wins these litigations remains to be seen. Tolling in Maharashtra is contentious given the State government’s promise of toll-free roads. The level of related party transactions is also high. For example, outstanding loan given to its holding company remains at over ₹300 crore from the 2013 fiscal onwards.

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