MPL reported mixed numbers for Q3FY11 with flat sales on a QoQ basis at Rs3.5bn (PINCe Rs4.2bn), margins gave a positive surprise at 12.7% (PINCe 9.5%) leading to better than estimated PAT at Rs115mn, 6% up YoY (PINCe Rs94mn). Broadly we maintain our estimates, but given the recent de-rating in infra stock we lower our P/E multiple for construction division from 10x to 8x FY12E. We believe a large part of the value for MPL is locked in its power venture, which the management expects to commission by June 2011. We see limited risk to valuation from current level as the core business is expected to report minimum PAT of Rs494mn FY12E, the current Mcap of the total entity stands at Rs7bn. The risk being further delay in power and coal project, since debt is expected to cross Rs7.5bn by FY11E end (D/E 1.2x FY11E).

Extended rains impact execution

MPL reported lower sales led by slow execution especially in roads and irrigation. We expect better execution in Power and Irrigation over the next few quarters. The Power project phase I, is expected to be completed by June’11 (refer pg. 3 for details).

Margins - a positive surprise

MPL reported EBITDA margin of 12.7%, inspite of low margin segments like road and power, which constituted 87% of sales. Other expenses were substantially lower at 2.1% against 8.7% in H1FY11 (refer pg. 3 for details).

Concern over heavy balance sheet

Standalone debt has increased substantially to ~Rs7bn. As a result, net interest cost as a % of sales has increased to 3.4% for 9m FY11 from 2% in FY10 (refer pg. 4 for details).

VALUATIONS AND RECOMMENDATION

We lower our target price to Rs150 from Rs169, which is largely due to reduction in core EPC business multiple from 10x to 8x. We now value the core business at Rs53 per share. We value the road and power assets on same old premises but adjust for the time value and carry it forward to FY12E basis. We maintain our BUY recommendation.