EPC revenue ahead of estimate, but margin under pressure
Marg reported Q3FY11 standalone revenue of INR 3.2 bn (up 37% Q-o-Q), ahead of our expectation of INR 2.5 bn, but PAT at INR 159 mn (up 19% Q-o-Q) was in line with our estimate of INR 151 mn. While the top line jumped 54% Y-o-Y, PAT declined 23% due to lower EBITDA margin from 16.6% to 10% Y-o-Y (due to the greater blend of external projects) and also higher interest costs on account of rising working capital requirements.
Karaikal port cargo at 1.1 MT due to seasonal factors
Karaikal port handled 1.1 MT in Q3FY11 (against 1.37 MT in Q2FY11) due to cyclones/seasonal factors and reported revenue of INR 432 mn and EBITDA of INR 175 mn. Management indicated that higher equipment hire costs and tax provisions for prior period also impacted earnings. The company handled 3.7 MT cargo for nine months and could handle upwards of 5 MT for FY11 . Despite subdued volume for the quarter, revenue and earnings could be in line due to higher realisation on account of better cargo mix (fertilizer at 24%) and revenue from ancillary services like warehousing, packaging, among others.
Residential project launches at SEZ moderates; restructuring on cards
The SEZ business has moderated on account of lower revenue booked (due to revenue recognition limitations of AS7 on booking of new residential projects) while costs continued to be booked upfront because of which SEZ reported EBITDA loss during the quarter. Management has guided for robust bookings
which will negate earnings impact in future. The company has decided to hive-off non-SEZ residential projects to Marg Properties (a wholly owned subsidiary) that will enable the parent company to focus on its core EPC business.
EPC orderbook robust; external orders pipeline strong
EPC order flow continued to be robust for the quarter. Current order book, at INR 35 bn (INR 28 bn internal & INR 7.6 bn external EPC orders), gives strong visibility on standalone revenue.
Outlook and valuations: Positive; maintain 'BUY'
Owing to slower–than-expected residential launches at the SEZ we have revised down our SEZ numbers by ~10% for FY11 and have now valued only the external EPC business at INR 19/share. We are introducing FY13 estimates and increasing in line with changes in macro assumptions to arrive at SOTP target price of INR 333 and maintain'BUY' recommendation on the stock.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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