Please refer to important disclosures at the end of this report
1
Company background: MEP Infrastructure Ltd (MEP) is promoted by the Mhaiskar
Family. MEP operates 18 toll collection projects (as of 19 March, 2015)
w
ith an
aggregate of 33 toll plazas, 5 Operate-Maintain-Transfer (OMT) projects covering
2,530 lane kms with an aggregate of 15 toll plazas and 1 BOT project covering
42.0 lane kms with 5 toll plazas. These ongoing projects are located across 10
states in India.
Pros: (1) Traffic growth and escalations from existing projects to lead to
improvement in the cash flow profile, (2) Strong OMT pipeline (as highlighted by
management), with possibility of new order wins, could lead to re-rating.
Cons: (1) Weak financials (negative networth of `224.5cr; debt of `3,218.3cr; net
loss of `117.5cr for FY2014 and `97.3cr in 7mFY2015), (2) loans and advance
of `357.6cr made to promoter entity.
Outlook and Valuation:
W
e have valued MEP’s projects using the free cash
flow to equity holders (FCFE), applying a 14% discount rate. Considering (1)
toll rate hike across Mumbai 5 Entry points project, (2) regular churn of new
shorter duration projects, and (3) 5 projects getting completed by September
2016, we arrived at a consolidated FCFE value of ~`850cr. In absence of
data, our estimates do not capture any FCFE value for (1) Jammu-Udhampur
OMT project (NHAI has announced MEP as H1), and (2) Delhi Entry points
OMT projects.
MEP post-issue would have market capitalization of ~`1,042cr - `1,065cr (at
price band of `63-65/share), which is higher than MEP’s FCFE value of ~`850cr.
Considering limited data for 2 recently won projects, we see limited upside for the
stock from its issue price and hence recommend NEUTRAL on the issue.
Key Financials
Y/E March (` cr) FY10 FY11
FY12 FY13 FY14
7mFY15
Net Sales 328
449
1,080
1,280
1,198
1,114
% chg 36.9
140.4
18.5
(6.4)
Net Profit (1) (85)
(55) (62) (118)
(97)
% chg N
A
N
A
N
A
N
A
EBITDA (%) 1.7
17.2
32.3
28.5
26.8
17.3
EPS (Rs) (0) (8)
(5) (6) (11)
(9)
Source: Company; Note: NA- Not Ascertainable
NEUTRAL
Issue Open: April 21, 2015
Issue Close: April 23, 2015
Issue Details
Face Value: `10
Present Eq. Paid up Capital: `111.5cr
Fresh Issue**: 5.4cr Shares
Offer for Sale: 0.0cr Shares
Post Eq. Paid up Capital**: `165.5cr
Issue size (amount): `340cr
Price Band: `63-65
Lot Size: 225 shares
Post-issue implied mkt. cap:
`1,042cr- 1,065cr
Promoters holding Pre-Issue: 97.2%
Promoters holding Post-Issue: 65.5%
Note:**at Lower-end of the price band
Book Building
QIBs 75% of issue
Non-Institutional 15% of issue
Retail 10% of issue
Post Issue Shareholding Pattern
Promoters Group 65.
5
MF/Banks/Indian
FIs/FIIs/Public & Others
34.
5
Yellapu Santosh
022 – 3935 7800 Ext: 6828
MEP Infrastructure
IPO Note – Limited Upside to IPO price; NEUTRAL
IPO Note
|
Infrastructure
/
Tolling
April 21, 2015
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
2
Issue Details
MEP Infrastructure is offering fresh issue of 5.4cr equity shares of `10 each via
book building route in a price band of `63-65. This issue would constitute 32.6%
of the post-issue paid-up equity share capital of the company (at the lower end of
the price band).
Exhibit 1: Shareholding Pattern
Pre-Issue Post-Issue
Particulars No. of Shares (%) No. of Shares (%)
Promoter Group 108,341,107 97.2 108,341,107 65.5
Retail & HNI Investors 3,153,143 2.8 16,645,206 10.0
Institutional Investors
40,476,190 24.5
Source: Company, Angel Research
Objects of the Offer
Utilize the fund for debt repayment of `262cr.
General Corporate Purposes.
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
3
Key Investment Rationale
Negative Net worth, with substantial Debt
Even though MEP is in the toll collection business, it has a sticky revenue model
and we are concerned about their consolidated level negative net worth and
higher debt. Higher interest expenses (reported lower interest coverage ratio of
0.62x in FY2014) are eating into the company’s consolidated profitability. MEP
reported a consolidated net loss of `117.5cr in FY2014 (and `97.3cr in
7MFY2015).
As of 7MFY2015-end, MEP (on consol. basis) is sitting on a debt of `3,218.3cr
and having a negative net worth of `224.5cr. Given that `262cr of the total
`340cr raised from the IPO would be used towards debt repayment, the consol.
debt post the IPO would decline to `2,956.3cr. After the debt repayment, MEP
would continue to report losses for the next 1-2 years, as there would be no big
relief at interest expense level.
Over `126cr of claims related to Chennai Bypass (related to loss of revenues), as
per the 3CGM Committee Arbitration proceedings are awarded to MEP and this is
likely to be booked in FY2015E financials. On adding-up the claim reversal and
IPO proceeds, the net worth of the company would turn positive. Still, the
consolidated D/E ratio would be at ~45.1x.
Near-term concerns over Debt repayment
As of 7MFY2015-end, MEP (on a consolidated basis) reported negative net worth
of `224.5cr and debt of
`3,218.3cr. During FY2012-2014, it generated average
Cash Flow from Operations (CFO) to the tune of
`410cr. On adjusting for yearly
capex and interest payments, MEP would be left with hardly any cash flows to
repay meaningful debt. Unless MIPL (its 100% subsidiary) reports revenues of over
`500cr (which we expect by FY2018E), considering churn of new short-term
projects into the portfolio, it would be tough for MEP to start meaningful debt
repayment in the near-term.
Good Times ahead for MIPL, meaningful debt re-payment
to start in FY2018E
Consolidated debt of MEP is on account of its flagship project, Mumbai 5 entry
points (ie MIPL; accounted for 18.5% of 7MFY2015 consol. revenues), for which it
made an upfront payment of `2,100cr. In our view, despite the ~18% toll rate
hike in October 2014 (translating to 16.1% yoy increase in FY2015E revenues),
higher interest expenses would lead to net losses at the project level. However, on
considering ~5% yearly traffic growth and ~18% toll hike once every 3 years
(assumed 8.7% revenue CAGR during FY2012-2026E), we expect MIPL to report a
net profit only in FY2018E. On the back of toll income growth, we expect MIPL to
start substantial debt repayment from FY2018E and complete the debt repayment
by FY2025E. Based on our calculations, we arrive at FCFE value of `357.3cr for
MIPL.
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
4
Concern over related party transactions
Since FY2013-end, MEP, despite having negative net worth and deteriorating
financials, has made loans to one of its promoter entities, Ideal Toll &
Infrastructure Private Limited (ITIPL). As of 7MFY2015-end, MEP made loans to its
promoter entity to the tune of `357.6cr and in return it gets meager interest on
these loans. The Management clarified that loans and advance to the parent have
been for business purpose only and fell short of providing further details.
Tolling Industry yet to mature
In 2014, 62 toll booths were abolished by NHAI. Also, in recent times, toll booth
politics across few regions has gained prominence, where concessionaires are
forced to either terminate or abolish toll collection contracts. Notably, Maharashtra
government announced termination of 12 tolling projects and exempted light
motor vehicles and state transport corporation buses from tolling at 53 toll plazas,
without providing any details. 3 projects of MEP in Maharashtra (excluding MIPL)
have been partially affected by this ruling; however these 3 combined contribute
less than 2.6% of revenue (7MFY2015 consolidated revenues). Also, the
Management highlighted that for these projects a possibility of (1) extension on
project duration, and (2) levy of higher toll on heavy vehicles is being worked, and
discussions with concessionaire would soon start. On a whole the toll collection
company is protected, as an assurance of outstanding debt and equity re-
imbursement is outlined (reimbursement details vary from project to project, on
case to case basis). Given that the industry is at a nascent stage, it would take a
few years for regulatory set-up to evolve and address these issues at larger level.
High competition to emerge, given the low entry barriers
Toll collection industry in our view is characterized by minimal capital requirements
(given the concession fee sharing arrangement to authority), which lowers the entry
barriers. With overall pie expected to grow, we expect the bidding intensity to
further increase from here-on. On the back of higher bidding intensity, there exists
a possibility of MEP losing its market share as well as new wins coming at lower
IRRs (vs. the ongoing projects).
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
5
Outlook and Valuation
We have valued MEP’s projects using the free cash flow to equity holders
(FCFE), applying a 14% discount rate. Considering (1) toll rate hike across
Mumbai 5 Entry points project, (2) regular churn of new shorter duration
projects, and (3) 5 projects getting completed by September 2016, we arrived
at a consolidated FCFE value of ~`850cr. In absence of data, our estimates
do not capture any FCFE value for (1) Jammu-Udhampur OMT project (NHAI
has announced MEP as H1), and (2) Delhi Entry points OMT projects.
MEP post-issue would have market capitalization of ~`1,042cr - `1,065cr (at price
band of `63-65/share), which is higher than MEP’s FCFE value of ~`850cr.
Considering limited data for 2 recently won projects, we see limited upside for the
stock from its issue price and hence recommend NEUTRAL on the issue.
Risks
Uptick in OMT award activity: MEP’s Management sounded optimistic on the huge
NHAI award opportunity in OMT space (Management expects ~20,000kms of
OMT award activity in next 3 years) and future revenue growth visibility. We differ
from the Management’s view on emerging opportunity owing to factors such as (1)
minimal business entry barrier, given the asset light business model, (2) higher
bidding intensity, and (3) lower profitability. Risk to our assumptions could be a
scenario, where the OMT space sees huge NHAI award activity.
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
6
Exhibit 2: Profit & Loss Statement (Consolidated)
Y/E March (` cr) FY10 FY11 FY12 FY13 FY14 7mFY15
Net Sales 328 449 1,080 1,280 1,198 1,114
% Chg
36.9 140.4 18.5 (6.4)
Total Expenditure 323 372 731 915 877 921
Operation & Maintenance Exp. 313 321 668 833 802 857
Employee Expenses 6 15 41 53 50 41
Other Expenses 4 35 22 29 26 24
EBITDA 5 77 349 365 321 193
% Chg
1,313 351 5 -12
EBIDTA % 1.7 17.2 32.3 28.5 26.8 17.3
Depreciation & Amortization 0 39 95 99 126 106
EBIT 5 39 254 266 194 87
% Chg
673 557 5 -27
Interest and Financial Charges 5 130 377 377 380 232
Other Income 1 14 56 22 42 27
PBT 0 (77) (66) (89) (143) (119)
Tax 2 14 (5) (26) (24) (21)
% of PBT 360.0 (17.7) (8.1) (29.5) (16.4) (17.3)
PAT before Minority Interest (1) (91) (60) (62) (120) (98)
Minority Interest (0) (5) (5) (0) (2) (1)
PAT (1) (85) (55) (62) (118) (97)
% Chg
NA NA NA NA
PAT % (0.4) (19.0) (5.1) (4.9) (9.8) (8.7)
EPS (on Pre-IPO shares o/s) (0.1) (7.6) (4.9) (5.6) (10.5) (8.7)
% Chg
NA NA NA NA
Source: Company, Angel Research
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
7
Exhibit 3: Balance Sheet (Consolidated)
Y/E March (` cr) FY10 FY11 FY12 FY13 FY14 7mFY15
Sources of Funds
Equity Capital 11 11 100 100 100 111
Reserves Total & MI 86 15 7 (85) (251) (336)
Networth 97 26 107 15 (151) (225)
Total Debt 113 2,768 3,031 2,952 3,005 3,218
Other Long-term Liabilities 0 1 1 1 158 106
Deferred Tax Liability 0 0 0 0 0 0
Total Liabilities 211 2,795 3,140 2,967 3,012 3,100
Application of Funds
Net Block 2 2,254 2,207 2,151 2,320 2,223
Capital WIP 0 0 0 0 0 0
Investments 0 94 3 3 1 32
Current Assets
Inventories 0 0 0 0 0 0
Sundry Debtors 29 28 4 38 29 12
Cash and Bank Balance 20 61 82 154 162 169
Loans & Advances 179 834 918 861 841 1,038
Other Current Asset 0 2 12 6 32 38
Current Liabilities 19 558 192 307 458 537
Net Current Assets 209 367 825 752 606 719
Other Assets 0 80 104 61 85 126
Total Assets 211 2,795 3,140 2,967 3,012 3,100
Source: Company, Angel Research
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
8
Exhibit 4: Cash Flow Statement (Consolidated)
Y/E March (` cr) FY10 FY11 FY12 FY13 FY14 7mFY15
Profit before tax 0 (77) (66) (89) (143) (119)
Depreciation & Oth. Adj. (0) 25 39 78 102 88
Change in Working Capital (117) (608) (30) 65 41 (168)
Interest & Financial Charges 5 130 377 377 380 232
Direct taxes paid (9) (24) (13) 0 (9) (25)
Cash Flow from Operations (120) (555) 306 431 371 9
(Inc)/ Dec in Fixed Assets (0) (2,285)
(48) (43) (73) (5)
(Inc)/ Dec in Investments 12 (173) 130 5 123 26
Cash Flow from Investing 12 (2,457)
82 (39) 51 21
Issue/ (Buy Back) of Equity 0 5 134 0 (124) 25
Inc./ (Dec.) in Loans 119 3,147 (125) (61) 78 189
Dividend Paid (Incl. Tax) 0 0 0 0 0 0
Interest Expenses (4) (113) (383) (332) (350) (238)
Cash Flow from Financing 115 3,038 (375) (393) (396) (24)
Inc./(Dec.) in Cash 7 26 14 (0) 25 6
Opening Cash balances 4 11 38 51 51 76
Closing Cash balances 11 38 51 51 76 82
Source: Company, Angel Research
MEP Infrastructure
|
IPO Note
A
pril 21, 2015
9
Disclosure of Interest Statement MEP Infrastructure
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%)
Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
Note: We have not considered any Exposure below
`
1 lakh for Angel, its Group companies and Directors
Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
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