By Geetanjali Kedia

MEP Infrastructure Developers is entering the primary market on Tuesday 21st April 2015, to raise Rs. 324 crore via the public issue, priced in the band of Rs. 63 to Rs. 65 per share. The issue comprises a fresh issue of 4.98 crore to 5.14 crore equity shares of Rs.10 each, representing 30.9% and 31.6% of the post issue paid-up capital, at the upper and lower end of the price band respectively (depending on price discovered). To be listed on NSE and BSE, the issue closes on Thursday 23rd April.

MEP Infrastructure, owned by Dattatray and Jayant Mhaishkar (father and younger brother of IRB Infra’s Virendra Mhaishkar), is engaged in tolling operations across 10 Indian states, operating 18 toll collection projects (12 short term and 6 long term), 5 OMT (operate maintain transfer) projects of 2,530 lane kms and 1 BOT project. This IPO is being undertaken to partly re-pay loans of Rs. 262 crore, of company’s 99.99% subsidiary MEP Infrastructure Pvt. Ltd. (MIPL).

Of Rs. 262 crore, Rs. 127 crore will be repaid for loan taken from IDFC, which is the lead BRLM to the issue. While disclosures are in place, one wonders how easy / difficult it is for BRLM / company to justify pricing, given their interest in the issue success!

MIPL has extended unsecured loan worth Rs. 358 crore (outstanding on 31-10-14) to Ideal Toll and Infrastructure Pvt. Ltd (ITIPL), promoter company of MEP Infra, and Rs. 121 crore to MEP Infra, as mobilization advance. On one hand, MIPL wants to re-pay debt, while on other, it is has extended unsecured loans, that too, to group companies! Strange! Infrastructure sector and corporate governance – can these two ever go hand-in-hand?

The company’s financial position is very precarious. For FY14, it reported consolidated total income of Rs. 1,240 crore, down 5% YoY from FY13’s Rs. 1,302 crore, while profit before tax (PBT) swelled to negative Rs. 143 crore from negative Rs. 88 crore in FY13, as depreciation charge ballooned to Rs. 126 crore in FY14 from Rs. 99 crore in FY13. Another expense straining profitability is interest burden of Rs. 380 crore, as debt remains at an exorbitant level of Rs. 3,000 crore, as of 31^st March 2014. On account of mounting losses, company’s accumulated reserves is negative to Rs. 252 crore, on 31-03-14, leading to negative net worth of Rs. 152 crore.

For seven months ended 31^st October 2014, although consolidated total income increased to Rs. 1,142 crore, PBT continued to be in the red, infact rose to Rs. 119 crore, as both depreciation and interest expense escalated to Rs.106 crore and Rs. 232 crore respectively. EBITDA margin is also showing shrinking trend - from 30% in FY13, 29% in FY14, to 19% during 7MFY15. Thus, despite rise in topline, company continues to bleed as both above the line (operating expenses) and below the line expense items (depreciation and interest) continue to rise dis-proportionately. This raises some serious doubts on company’s future prospects (read profitability).    

Company’s topline is the number of vehicles multiplied by toll at each project. The toll amount, for each project, is fixed as per the agreement, while traffic movement is not in company’s hands. Hence, topline, to some extent, is an uncontrollable factor. To increase the projects on hand, company needs to make further investments. In terms of expenses – major chunk is operation and maintenance charges, likely to be about Rs. 1,450 crore for FY15, based on an annualised 7M FY15 numbers, having shot-up by ~70% from Rs. 802 crore in FY14. Operation and maintenance charges, not being directly linked to revenue, have been accounting for higher percentage of revenues, up from 59% in FY12 to 64% in FY13, to 65% in FY14 and jumping to 75% during 7MFY15. They are likely to remain north-bound due to passage of time and general inflation. Other major expense heads, viz. depreciation and interest are also mounting. Thus, without further capital investment on new projects, revenue is an uncontrollable factor, while company’s expenses are heavy and fixed in nature. 

Since balance sheet is heavily leveraged, Rs. 262 crore debt repayment is like a small change vis-à-vis the total outstanding debt (Annual interest of Rs. 380 crore in FY14 itself is higher than Rs. 262 crore repayment)! After re-payment, consolidated net debt of Rs. 3,039 crore, as of 31-10-14, will be a staggering Rs. 2,777 crore, with annual interest outgo of over Rs. 350 crore, post-IPO. Thus, there is not much respite in terms of easing the leverage or pressure to service debt. For just Rs. 324 crore, company is dilution a heavy 31% of equity, which not only indicates financial weakness, but also desperation for funds.

On 28^th May 2014, company had undertaken fresh issue of 1.15 crore equity shares to promoter ITIPL at Rs. 21.75 per share. Now, at Rs 65, the IPO to public shareholders is being undertaken at nearly 3 times the price offered in May. What is the justification for this 199% premium, when the financial strength and profitability has only worsened in the past 11 months? Another case of promoters filling in their pockets before IPO!

In addition to weak financials, future uncertainties surrounding the business are other points of concern. Last year, due to temporary injunction from Madras High Court on collection of toll from certain vehicles on Madurai Kanyakumari Project, company had received a temporary set-back. Maharashtra Government has recently closed down 44 toll plazas, which includes one of company’s long term toll collection project at Nagzari, which was valid until September 2015.

Also, from 1st June 2015, toll for private cars and state transport buses is being abandoned at 53 toll plazas in Maharashtra, in addition to complete closure of 12 toll booths, as part of BJP Government’s assembly election promises to make the state ‘toll-free’. Moreover, decision on the five entry points into Mumbai (which company operates and is the highest revenue earning OMT project contributing ~20% to consolidated revenue) would be taken in June. In addition, news reports suggest of Government’s plan to close down 125 toll plazas through-out India. This can challenge not only the company’s business model, but also jeopardize its existence, as it is common knowledge that litigation with regulatory authorities is both time consuming, expensive and many-a-times a futile exercise in India.

The company has also been slapped with huge penalties on few projects, which if materializes, may put additional pressure on cash flows, as well as the P&L statement. Rs.13 crore penalty has been imposed on the Hyderabad Bangalore project, while Rs. 12 crore on Chennai Bypass project, both being under litigation. Another subsidiary Baramati Tollways Pvt. Ltd. has, as per its right, issued termination notice to MSRDC, as the latter delayed handling over land for development of the Baramati BOT project. However, company continues to operate the project and incur losses, as the notice has not been accepted and there is no guarantee of receiving termination payment.

Without even getting onto valuations, fundamentals and business itself are not comforting. Just for sake of records, at Rs. 65 per share, company will fetch a market cap of Rs. 1,049 crore and be valued at enterprise value (EV) of Rs. 3,825 crore, which translates into EV/EBITDA multiple of over 10 times. Noida Toll Bridge can be considered its closest peer, although smaller in size, with topline of just Rs. 120 crore, which is trading at EV/EBITDA of 6.7x and PE multiple of 7.6x, with market cap of Rs. 600 crore and EV of Rs. 585 crore. Noida Toll is debt free and reports net margin of 60%, which justifies premium despite lower size.

With respect to MEP Infra, there are no compelling reasons to invest. Besides unattractive valuation, heavy expenses, leading to continuing losses year-after-year, have taken a toll on the financials. Also, exorbitant debt, uncertainties surrounding toll collection, coupled with corporate governance issues make the issue very risky. Hence, the issue must be avoided.

Disclosure: Not applying in the IPO.