This article provides in-depth fundamental analysis of MBL Infrastructure Limited (MBL Infra), an Indian infrastructure player focusing on the construction of roads in both build operate & transfer (BOT) as well as engineering, procurement and construction (EPC) segments.
In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
MBL Infrastructure Ltd (MBL Infra) Research Report by Reader
Financial Analysis of MBL Infra:
- Sales growth 24%
- Profitability 4.16
- Interest coverage 1.9
- Debt to Equity ratio 1.9
- Current ratio 3.15
Valuation Analysis of MBL Infra:
- P/E ratio 3.37
- P/E to Growth ratio 0.52
- Earnings Yield (EY) 28%
- P/B ratio 0.47
- Price to Sales ratio 0.15
- Dividend Yield (DY) 1.72
Business & Industry Analysis of MBL Infra:
- The government seems to be investing a lot on infrastructure projects which a positive sign and Budget 2017 will be a positive trigger going forward.
- Order Book is around 8000cr. Increased by 81% in 2015-2016.
- Book value is 156rs.
Management Analysis of MBL Infra:
- Nothing much negative found about Chairman Anjanee Kumar Lakhotia. Though Promoters have pledged shares of around 10% this year and promoter holding is 37% (47% before pledging).
- Management is confident of having 20-25% sales growth in next few years based on huge Govt infrastructure investments.
- They have Targeted Revenues of ₹5,000 cr by 2020.
With P/E around 3.4, the order book of ₹8,000cr and Govt positive view on infrastructure development, MBL (CMP – ₹74) seems to have potential to become a multi bagger in next few years with high risk involved too because of huge debts, pledging issues and volatile infrastructure industry.
Annual Report Analysis of MBL Infra:
A) Communications from Promoters and Senior Management:
MBL Infra has proudly communicated in its FY2016 annual report that they have been awarded large projects that provide an attractive more than 24-month revenue visibility from 1st April 2016 onwards at margins that are correspondingly higher than what they earned in our earlier projects with revenues of 5000 cr by 2020. Ref: Annual report, 2015-16 Page 5.
B) Directors’ Report:
- MBL reported a 5-year CAGR of 18.46% in revenues ending 2015-16.
- MBL reported a 5-year CAGR of 12.72% in EBITDA ending 2015-16.
- MBL reported a 5-year CAGR of 7.11% in PAT ending 2015-16.
C) Management Discussion & Analysis (MDA):
- With increasing Government focus on the developing inland waterways on the line of National Highways, the Government has recent declared 101 rivers as waterways which will be developed to handle passenger as well as cargo movements thereby reducing the logistics costs.
- Highway Construction 2. Road Operations & Maintenance 3. Highway-BOT Projects 4. Industrial Infrastructure 5. Housing Infrastructure 6. Railway Infrastructure 7. Civil Engineering Projects
D) Details of Personnel in-Charge of running the Company:
Remuneration of Director: Mr. Anjanee Kumar Lakhotia has been around 41 lakhs for past 5 years and there has been an increase in his personal shareholding accordingly.
E) Balance Sheet:
We can see the comparative position of MBL at March 31, 2016, & March 31, 2015, and observe the way the balance sheet size has increased from Rs. 189,257.87 lakh to Rs. 211,579.95 lakhs. Almost half of the increase of Rs. 5,499.04 lakhs (Rs. 0.54 billion) has been contributed by increase in reserves & surplus around by Rs. 2000 crores lakhs.
This is a sign of healthy growth by a company. There has also been an increase in 14,000 crores which is not a healthy growth.
OPM has decreased from 14% to 11% in last few years.
F) Profit and Loss statement:
CFO has been inconsistent in last few years and net cash flow has been fluctuating too (as per data from Screener.in)
G) there has been no doubtful related party transactions in the balance sheet.
Dr Vijay Malik’s Response
Thanks for sharing your analysis of MBL Infra with us! We appreciate the hard work you have put to analyse MBL Infra.
As mentioned by us on the “Ask Your Queries” section of the website, until now we did not use to analyse the infrastructure/EPC players for our website. Our belief has been that from the publically available information, it is difficult to judge the exact business position of an EPC/infrastructure player. Following are the key reasons for it:
- The EPC contractor’s business is nothing but an accumulation of all its projects under execution. Unless each of these projects is assessed individually, the complete business position of the EPC player cannot be understood. From the publically available information, we find it difficult to assess whether these projects have key factors like land acquisition, govt. approvals etc. in place. We have always been sceptical about the cost estimates shared in the publically available information whether these are the real ones or there have been escalations, which companies usually hide from stakeholders.
- The revenue of the EPC players is derived from the cost incurred by them as these companies use a percentage of completion method. The revenue declaration has no linkage to the actual cash that an EPC player might or might not receive. There are always disputes between the stage of project claimed by the EPC player and the Govt depts/project allottees that have to release the payments etc. It cannot be assessed from the publically available information how the situations are on this front.
- The EPC players usually have a lot of subsidiaries and the assimilation of subsidiary financials into main company leads to many areas of accounting manipulations, which always raise an alarm in business assessment.
However, despite all the above-mentioned challenges, the publically available information does provide some insights into the functioning of the EPC players. We believe that such insights, though limited in their extent of analysis, do provide some actionable assessment to investors. Therefore, we have tried to analyse the publically available information of MBL Infra and tried to form some views about the company, which might be useful to all the readers.
Let us analyse the consolidated financial performance of MBL Infra for last 10 years (FY2007-16):
Financial Analysis of MBL Infra:
As per the reported numbers, MBL Infra has increased its revenue by a brisk pace of 25-35% over last 10 years (FY2007-16). This is a great performance by any company. MBL Infra uses a percentage of completion method for revenue recognition (FY2016 annual report, page 81):
Revenue Recognition: (i) In respect of construction/ project related activity, the Company follows percentage of completion method. Percentage of completion is determined by survey of work performed / physical measurement of work actually completed at the balance sheet date taking into account contractual price/ unit rates and revision thereto.
As mentioned above, we do not have much confidence in the revenue numbers arrived by management using a percentage of completion method of revenue recognition as this method relies on many assumptions on the part of management. The limitation of auditors’ expertise in understanding the business dynamics and thereby properly verifying the management assumptions is another factor, which leads to our scepticism in taking these numbers at face value.
Out of the total revenue of ₹2,342 cr. reported by MBL Infra, the only part that can be ascertained with reasonable certainty is the toll revenue, which contributed about ₹26 cr in FY2016 (annual report page: 31):
Over the years, the profitability margins of MBL Infra have been declining. Operating profitability margin (OPM) has reduced from 14% up to FY2012 to current 11% in FY2016. Similarly, the net profitability margin (NPM) has declined from 6% up to FY2012 to about 4% in FY2016.
An investor should also note that MBL Infra has reported losses in the Q2-FY2017 both at OPM and NPM levels.
Also Read: How to do Financial Analysis of a Company
As per the reported numbers, MBL Infra had a cumulative profit of ₹528 cr in last 10 years (FY2007-16), however, it had cash flow from operations of only ₹176 cr. during this period.
This is not a surprise considering our belief mentioned above that in the case of EPC project execution, the stage of the project accomplished by the EPC player is always disputed by the project awarding agency. It frequently leads to disputes related to receivables leading to delays in realization.
A look at the receivables position of MBL Infra at March 31, 2016, indicates two interesting facts:
1) The comparison of standalone & consolidated receivables position indicates that more receivables are outstanding at the standalone level than at the consolidated level. It indicates that the money received from third parties by its subsidiaries is not being paid by subsidiaries to the holding company.
Standalone Trade Receivables
Consolidated Trade Receivables
An investor would notice that about ₹103 cr. worth of receivables (Standalone receivables of ₹708 cr. – consolidated receivables of ₹605 cr.) have been withheld by subsidiary companies. We believe that it might be due to the pressure being put by the lenders of subsidiary companies that the money received by subsidiary companies should first be used to repay them rather than sending this money to the holding company.
2) The receivables details shared above also highlight the key comment by the auditor that “trade receivables are subject to confirmation by certain parties”. It indicates that the auditor is yet to get a confirmation by certain counterparties that they agree with the receivables claimed by MBL Infra from them. It might turn out that the counterparties might dispute these receivables and the actual money received might get delayed and might be less in amount than the claimed amount.
As witnessed by the investors earlier that MBL Infra has not been able to collect its cash from operations. However, the business of an EPC player is a capital intensive business, which requires frequent capital infusion by the company in its projects.
The investor would notice that MBL Infra has to do a capex of ₹1,062 cr in last 10 years (FY2007-16). This amount seems huge considering that the money MBL Infra collected from operations during the same period is very low at ₹176 cr.
Therefore, it would not come as a surprise to the investor that the company has to rely both on equity dilution as well as debt to meet this significant cash flow shortfall.
MBL Infra has diluted its equity twice in past 10 years. It raised about ₹110 cr. in FY2010 and then again ₹115 cr. in FY2015. Over and above the equity infusion, the company had to resort to debt funding as well. During FY2007-16, MBL Infra raised incremental debt of about ₹1,325 cr. as its debt increased from ₹77 cr. in FY2007 to ₹1,402 cr. in FY2016.
An investor would notice that such amount of capital requirement is huge in comparison to the cash generation ability displayed by MBL Infra in last 10 years.
Such situations usually lead to companies facing cash/liquidity crunch. An investor comes upon a lot of signs depicting the cash flow crunch being faced by the company. Let’s see a few of them:
Signs of cash crunch in MBL Infra:
1) Delay in depositing the undisputed statutory dues to govt. authorities as well as the dividend distribution tax, which it deducted in FY2015. (Page 75 of FY2016 annual report):
…..in respect of undisputed statutory dues including provident fund, income tax, sales tax, service tax, duty of customs, value added tax, cess and other material statutory dues have been regularly deposited during the year by the Company with the appropriate authorities except for tax deducted at Source by them which are sometimes not regularly deposited. also the Company has delayed in depositing the dividend distribution tax pertaining to dividend declared in the AGM of financial year 2014-15 amounting to ₹1,26,58,779/-.
2) A significant rise in the cheque overdrawn, which indicates utilization of bank limits over and above the authorized limit. It seems like a toned down term for bounced cheque, which should have been returned by the bank stating insufficient funds.
3) The stressing by the lenders for increasing pledge of shared by the holding company for the loans being availed by the company and its subsidiaries: (FY2016 annual report, page 85):
8.2 Short term secured borrowings from other party is secured by subservient charge on the current asset of the Company.Further, there is a collateral security by way of pledge of 33,46,689 (PY 11,12,000) shares of the Company by Promoter Company MBL A Capital Limited.
Further advised reading: How to know if Promoters are Losing Commitment to the Company
4) This is a recent development taken from the exchange filing done by MBL Infra on January 20, 2017. MBL Infra informed the exchange that a project, which was awarded by NHAI to it, has been terminated because the banks did not give it performance guarantee, which was asked by NHAI.
This development assumes significance as it indicates that a project, which MBL Infra believed that it would be able to complete successfully and profitably has been rejected by lenders. It might be either that lenders no longer believe that MBL Infra could complete the project or the lenders believe that the project would not be able to be completed profitably. In both the cases, it raises questions about the project assessment and execution ability of MBL Infra.
The fact that the project was finally terminated is serious as the company would have approached multiple banks when initial one or two banks would have shown their inability to provide the performance guarantee.
This development raises questions about the claims being made by the company that it would be able to achieve revenue of ₹5,000 cr by 2020. Moreover, if the company does not improve its cash realization by a significant proportion, then we fear that every incremental rupee of revenue chased by MBL Infra would further increase the debt burden on the company. This would, in turn, worsen the cash flow crunch being faced by the company.
It is surprising that despite the cash shortfall situation and deeply negative free cash flow (FCF) situation, the company has been continuously paying dividend to its shareholders. Dividends in a negative FCF company are effectively funded by debt and is not a good decision on part of the management as instead of conserving resources, such dividend payments push the company into further debt burden.
Investors should be cautious of investing in companies, which have continuously increasing debt levels, as high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions.
You should read the analysis of two other companies: Ahmednagar Forgings Limited and Amtek India Limited, to understand the impact of debt funded growth stories of companies. You may read their analysis here:
Infrastructure/EPC projects always carry a lot of uncertain risk factors, which vary from land acquisition, social unrest, political risk etc. These factors have a potential of delaying the project completion, which in turn increase the cost of projects primarily due to higher finance costs on the debt taken to fund the project.
MBL Infra has acknowledged that land acquisition delays influence the profitability margins of the projects (FY2016 annual report, page 41):
Land acquisition is still a challenge the Government of the day is facing. They have taken punitive steps of Enhanced Compensations and Transparency of the Transaction. Slower acquisition can dampen the pace of infrastructure development and margins to shrink for developers
If we analyse the other public sources of information, which MBL Infra has shared on its website, which includes various research reports, then we come to know that the projects being developed by the company are getting delayed.
JP Morgan report in Oct 2015 mentioned, at page 1, that the management believes that 3 under-construction BOT projects would be completed by June 2016 (within 9 months from the publication of the report).
BOT portfolio expansion put on hold. While BOT project awards by NHAI have picked up, MBL and KNR are not keen on expanding their portfolio. MBL expects its three under construction BOT roads to be operational by June’16 (6% of FY17 revenue based on consensus estimate), post which they may bid for more. KNR is targeting only EPC orders and may exit one of the two BOT projects upon completion which would contribute 8% of FY17 revenue based on consensus estimates.
However, the Brickwork credit rating report of July 2016, page 1, mentioned that the project was yet to be completed and in fact have been delayed and would be completed by FY2017.
Moreover, the investor presentation of MBL Infra for December 2016 has highlighted that all the BOT under-construction projects are yet to be completed as they are under implementation.
This brings the important point about taking management forecasts on the face value. The company believed in October 2015 that it would complete the nearing completion projects within next 9 months, which is not a very long period to forecast for a professional management, which is into the business for a long time. However, the near-term forecast could not be met and the projects seem to be yet to be completed.
Therefore, we advise our readers to take all management forecasts with a pinch of salt and not accept them without doing the own analysis.
The frequent delay in projects, reducing margins, high capex requirements, low cash realization, high debt requirements present a very tough business environment for EPC players. No wonder in recent past many infrastructure/EPC players have shut shop.
The following information from the page 7 of the JP Morgan report made available by MBL Infra on its website assumes significance in this matter:
As per MBL, currently there are 6-7 bidders per projects. Overall there are 53 players vs. 147 about 2 years ago with 20 bidders per project.
MBL Infra has claimed that in last 2 years, the number of players bidding for projects has reduced from earlier 147 to current 53 players. A number of bidders per project has come down from 20 bidders per project to 6-7 bidders per project. It means that about 2/3rd of the industry players have shut shop in last 2 years.
Investors who have analysed the business situation of the EPC industry would not be surprised by this information. We advise our readers to always keep this information in their consideration whenever they analyse any EPC player for investment.
Margin of Safety in the market price of MBL Infra:
MBL Infra is currently available at a P/E ratio of 2.5, which if seen on an exclusive basis, might seem to indicate that there is a margin of safety. However, looking at the stressed business performance and liquidity crunch being faced by MBL Infra, it seems plausible that the market is not able to assign higher P/E ratio to it.
In the last 7 years since the listing of MBL Infra in FY2010, the company has retained earnings of ₹439 cr (FY2010-16). During this period the market capitalization of MBL Infra has declined from ₹463 cr. to ₹222 cr. This data indicates that MBL Infra has destroyed the wealth of its shareholders. No wonder that market is not keen to assign it higher P/E multiples.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, MBL Infra seems to be a company, which has been growing its revenue at a fast pace, however, it has not been able to maintain its profitability with the revenue growth. It has performed very poorly on a collection of its receivables and as a result, has to rely on equity dilution and debt funding to meet its heavy capital investment requirements.
Poor cash flow from operations and heavy debt burden seem to have led to a liquidity crunch situation for the company where it is delaying statutory payments, deposition of dividend distribution tax and cheque overdrawn etc. MBL Infra now seems to have been losing the confidence of lenders who seems to have refused to provide performance guarantee to its project, which got terminated by NHAI.
As a result, we advise readers to be cautious while analsing and investing in MBL Infra and keep a close watch on its receivables collection status and debt levels.
Also Read: How to Monitor Stocks in your Portfolio
EPC industry has seemed to have witnessed about 2/3rd of its players shut shop and this sector bears the risk of permanent loss of capital for investors.
These are my views about MBL Infra. However, you should do your own analysis before taking any investment related decision about MBL Infra.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
Answers to Investors’ Queries
Bearing short term pain for long term gain?
Vijay Malik, good analysis, thanks. I agree with your takeaway.
Food for thought: Let’s assume the company is chasing market share and counts on the industry consolidating with fewer players and higher margins being the end-game – they’d have to stay afloat until this happens, but this might make the company much more profitable down the road. Generally, when growing rapidly, it’s done at the expense of profit margins.
Major red flags for me, however, are revenue recognition and the dividend. Their revenue recognition model can easily be used to move future revenues into today’s reporting period; something similar to what micro-strategy did in the early 2000s. I find 09, 10, 11 (negative CFO) at a high(er) OPM% and then 13, 14, 15 at a low(er) OPM% disturbing. The dividend itself is a fairly small nominal amount but in relative terms, that’s nearly 10% of the PAT – that’s huge in a negative CFO environment.
I did a quick search on insider trading but couldn’t find any trades done by the management. Management selling would be a huge red flag, management buying would put my mind a little more at ease.
Thanks for providing your valuable inputs to the analysis.
We agree that theoretically bearing the short-term pain of low profitability in order to wait for consolidation in the industry to enjoy higher/supernormal profits in future can be a logical thinking that the management of MBL Infrastructure Limited might be doing. However, we believe that it is not the optimal strategy for the company due to multiple reasons:
1) This strategy assumes that once the weak players are out and consolidation has happened, the competitive forces would wane. We disagree with this assumption. We believe that with the current abundance of capital availability with large institutional investors searching for investment opportunities and increasing openness of cross-border trade, would always keep on bringing new competitors. These competitors might be new players who would have got any contract due to political linkage and now happily got the backing of large PE firms to execute it. OR these competitors might be large infrastructure firms of other geographies who might be willing to enter into the country.
Moreover, there are much more much larger infrastructure firms (10-100 times larger than MBL), in India, which will never let other companies enjoy supernormal profits.
All in all, we believe that if the thinking of the management of MBL is to reap the benefits when competitive forces would weaken, then it is not the best thinking as competition will keep on arising from hitherto known or unknown sources.
2) Moreover, if the strategy was to bear short-term pain, then the company has obviously over done it. The company is facing a cash crunch and now seems to have lost the confidence of lenders in this capital intensive business.
Regarding management selling its stake, we believe that pledging of share is effectively selling the stake in a confounded manner as it allows promoters to cash out/take away the economic benefit of these shares in an indirect fashion.
Hope it provides you with our perspective on the strategy of MBL Infrastructure Limited.
All the best for your investing journey!
Dr Vijay Malik
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