Madhucon Projects (MPL) has a good mix of assets, which yield consistent returns and cash flows and which we believe will facilitate it to continue investing in the high-growth businesses of real estate, power and coal going ahead. We prefer MPL on account of the following: 1) Cooling commodity prices, which we believe would benefit MPL as it has orders with fixed price contracts; 2) Despite the recent run up in the stock, there exists a substantial valuation arbitrage between MPL and its peers; 3) MPL is one of the biggest beneficiaries of the improving liquidity scenario as it has an attractive portfolio of offerings; and 4) Certain catalyst/triggers (power and coal business) are still not priced in.
We have assigned a PE of 8x FY2011E EPS of Rs 25.7 for its core construction business, 1x FY2011E P/BV for its BOT business at a value of Rs 270 cr (Rs73/share). On the real estate front, we have valued the land, at Rs 18.9 cr (Rs 5.1/share). At Rs 227, the stock is trading at attractive valuations, 6.7x and 5.0x on FY2010E and FY2011E Earnings respectively, after adjusting for BOT projects, power and real estate. Therefore, we recommend a Buy on the stock with a SOTP Target price of Rs 305.