MEP Infrastructure Developers Limited has emerged as one the key contenders for build-operate-transfer (BOT) projects in the road sector. Till about a year ago, the company’s portfolio mostly comprised toll management and operate-maintain-transfer (OMT) concessions. In the last few months, the company has established a strong foothold in the market by securing several hybrid annuity projects awarded by the National Highways Authority of India (NHAI). Financially, MEP has reported robust growth in its revenue base over the years. An asset-light approach, coupled with limiting the level of capital employment to the minimum needed, has further stimulated steady growth in the company’s order book. In a bid to release locked-in capital and get easier access to funds, the company recently secured an approval for setting up an infrastructure investment trust (InvIT).
Expanding portfolio basket
MEP is one of the few companies which commenced operations on a pure toll collection-based business model. For the past 13 years, the company has executed over 110 projects across eight states in the country. It has completed 95 projects comprising 182 toll plazas and 1,086 lanes. As of May 2016, the company has 16 long-term and short-term toll collection projects, four long-term OMT projects and six long-term hybrid annuity projects in its portfolio. Geographically, MEP has a presence across most Indian states and is the most active in Maharashtra, which accounts for over 40 per cent of its portfolio in terms of lane km. Over the years, MEP has actively participated in tolling/OMT projects put on the block by NHAI. During the period 2011-12 to 2014-15, MEP bid for 59 per cent of the 324 toll projects awarded by the authority.
The company has a steady track record of securing repeat orders. In 2002, MEP commenced tolling at five Mumbai entry points. In 2010, the project was reawarded to MEP on an OMT basis for a period of 16 years. Some of the other repeat orders include toll collection at the Chirle and Karanjade plazas in Maharashtra, toll plazas on the Ahmedabad-Vadodara expressway in Gujarat and toll collection at the Rajiv Gandhi Sea Link in Mumbai. However, in April 2016, MEP Chennai Bypass Toll Road Private Limited (MEPCBTRPL), a subsidiary of MEP Infrastructure Developers Limited, handed over the Chennai bypass project facilities and the toll plaza to NHAI. This was due to the fact that during the operation period, certain disputes arose on account of toll evasion and fee rule notification between MEPCBTRPL and NHAI. MEPCBTRPL, had entered into a concession agreement with NHAI on January 14, 2013 for the operation and maintenance of the Chennai bypass section from km 0 to km 32.6 in Tamil Nadu on an OMT basis.
Recently, MEP secured six projects spanning a length of about 940 lane km to be implemented on a hybrid annuity basis. In April 2016, MEP in a joint venture (JV) with its Spanish partner received letters of award (LoAs) for projects worth Rs 17.6 billion from NHAI and the Ministry of Road Transport and Highways (MoRTH). MEP has formed a JV with Sanjose India Infrastructure and Construction Private Limited, with the companies holding 74 per cent and 26 per cent respectively. These projects are in addition to other toll collection contracts secured by MEP in the recent past.
Of the six projects secured on a hybrid annuity basis, four are located in Maharashtra and two in Gujarat. The construction period of these projects ranges between two and 2.5 years with a concession period of 15 years. These projects are currently in the process of achieving financial closure. MEP is required to arrange funds for 60 per cent of the project cost while the remaining 40 per cent will be provided by NHAI during the construction period. Subsequently, during the operation period, NHAI will pay the concessionaire the remaining 60 per cent in the form of semi-annual payments, along with the interest accrued.
What the numbers say
In May 2015, the company was listed on the stock exchanges through an initial public offering (IPO) of Rs 3.24 billion. On the financial front, the company has recorded a strong set of numbers in the past few years. MEP’s total revenue increased at a compound annual growth rate (CAGR) of about 17 per cent during the five-year period 2011-12 to 2015-16. The company has been focusing on increasing the revenue share of long-term projects. Between 2011-12 and 2015-16, the share of revenue from long-term contracts increased from about 39 per cent to 66 per cent.
The earnings before interest, taxes, depreciation and amortisation (EBITDA) increased at a CAGR of 10 per cent during the same period. Its revenues in 2015-16 grew on the back of a robust increase in operating income led mainly by an enhanced contribution from long-term toll collection projects. A higher share of long-term contracts in the portfolio reduced the concession payments obligations of the company. As a result, it reported profit after tax (PAT) of Rs 263.3 million during 2015-16 in contrast to a loss of Rs 1.15 billion reported during 2014-15. Further, during 2015-16, finance cost declined by Rs 203 million due to repayment of debt through the utilisation of proceeds from the IPO. As a part of an amicable settlement, the company handed over the Chennai bypass project to NHAI in April 2016.
In a major development, in June 2016, the Securities and Exchange Board of India granted a certificate of registration as an infrastructure investment trust to MEP, which is the sponsor for the MEP InvIT. InvITs provide infrastructure developers an investment vehicle to refinance current infrastructure projects and high-cost debt as well as free up currently invested capital for reinvestment in new projects.
The formation of the MEP InvIT is expected to bode well for the company’s financial position. MEP views hybrid annuity projects as a dual opportunity. These projects will provide longer- term revenue visibility in the form of annuity payments as well as create an opportunity for the company in the toll collection space since tolling contracts will be bid out separately after the completion of construction.
A geographically diversified portfolio and strong experience across states allows the company to make strategic investment plans. Future prospects for the company are set to improve with benefits accruing from premium rescheduling, inflow of new orders, conducive government policies, industry expectations of revival in traffic growth and an overall positive sentiment for macroeconomic recovery. However, in the near term, MEP will be faced with incremental equity requirement owing to the new orders received during the past three to four months. That said, faster clearance of the order backlog and greater fiscal prudence will be key to augmenting revenues.
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