Madhucon Projects (MPIL) recorded dismal Q2FY11 numbers. PAT was at Rs67mn vs. our expectation of Rs123mn. Lower PAT is due to 8% lower-than-expected sales, lower EBITDA margin at 9.7% vs. 10.2%. The net impact of H1FY11 performance to our FY11 estimate is increase in sales estimate by 11.5% to Rs16.8bn in FY11. We reduce our EBITDA margin to 9.5% against 10.1% and PAT to Rs405mn vs. earlier Rs534mn. We also lower our P/E multiple to 10x from 11x one year forward. We maintain our BUY rating with a lower target price of Rs169.

Irrigation, BOT and Power expected to drive H2FY11 revenue; we increase our sales estimate The momentum will be driven by the power and road segments, as Phase II has been financially closed and Chhapra-Hajipur road is expected to start construction within 1-2 months. EPC work comprises Rs12bn and
8.2bn respectively of order book..

Margin negatively impacted. Lower FY11 margins Given our assumption that H2FY11 will be led further by the road and power segment, which are low-margin businesses, we reduce our EBITDA margin for FY11E to 9.5% where as for FY12E, we marginally reduce it to 9.7% from 10.1% earlier.

Concern over heavy balance sheet We note that the debt position has increased substantially to ~Rs5.3bn adjusted for mobilisation advances as MPIL invests in its power and road assets. Further, working capital has deteriorated..

ValuationS and Recommendation We are reducing our target price to Rs169 from Rs182, which is largely due to reduction in core EPC business earnings due to lower margin and higher interest cost. Hence we lower our valuation for the core EPC business along with reduction in earnings, which we forecast to register a de-growth of (12%) in FY11. We now value the core business at 10x one-year forward earnings of Rs6.5 per share at Rs65.1 per share. We value the road and power assets on our same old premises only adjust our estimates for the half year completed time value, i. e. cumulative value of Rs95. We lower our target to Rs169 which still gives us a 18.5% upside. We maintain our BUY recommendation.