Independent Research Report – Marg Limited

 Anchoring growth on diversified paths                                                              Industry  Construction & Engineering

                                                                                                                           Date        November 16, 2010

Chennai-based Marg Ltd (Marg) is a diversified infrastructure player present in ports, real estate and EPC works. Karaikal Port, in which Marg has ~80% stake, is the vanguard of the company's future growth given its strategic location, capacity constraints in neighboring ports and growth in the hinterland. This is propped by expansion plans in SEZ, residential and commercial real estate and EPC work from third parties. Although the company has been successful in completing projects on time, its future development plans are ambitious and exposed to execution challenges. We assign Marg a fundamental grade of '3/5', indicating that its fundamentals are 'good' relative to other listed securities in India.

Karaikal Port well positioned to tap hinterland growth; upcoming power plants key

Karaikal Port is expected to register strong growth in the next four-five years given its a) strategic location between the heavily congested Chennai and Tuticorin ports, b) rich hinterland with upcoming power and cement plants and c) well-developed port facilities and logistics - good rail and road connectivity, deep draft, faster turnaround time and high level of mechanisation compared with nearby ports. However, any delay in the installation of the power plants (~11,000 MW) in the hinterland with a potential coal demand of ~22 mtpa might have an adverse impact on the future growth prospects.

Real estate – significant value accretion in the offing; execution challenges remain

Of the total land bank of 1,800 acres mainly in Tamil Nadu, Marg is developing: (a) a SEZ on 612 acres with a saleable area of 446 acres in Cheyyur, 88 kms from Chennai; (b) ~1 mn sq.ft. of leasable area of mall and office blocks at OMR, the heart of Chennai's IT corridor and c) residential properties in OMR and other regions in Tamil Nadu. Although there were initial hiccups, sales have picked up in the recent past with recovery in the real estate industry. We believe these projects will lead to significant value creation given the low-cost land bank. However, there are execution challenges given Marg's limited track record and complexities in the upcoming projects.

EPC is gaining momentum

Marg's external business is ramping up with robust growth in order intake. Its current third party EPC order book has increased substantially from Rs 880 mn in FY09 to Rs 5,150 mn currently and is likely to be executed in the next 18-24 months. We believe strong growth in order book is a testimony of Marg's increasing credentials and strength in EPC space, and has laid the foundation for capturing future growth in this space.

Revenue and margins to grow; RoE to increase in next two years

Revenues are expected to grow at a two-year CAGR of 66% to Rs 10.1 bn in FY12 mainly driven by growth in the port and EPC businesses. EBITDA margins are expected to remain in the range of 21-22%. Consolidated PAT is expected to grow at a two-year CAGR of 148.4%, primarily on account of strong growth in top line and increasing profitability of the port project. RoE is expected to improve from 3.9% in FY10 to 10.1% in FY12.

Valuation - the current market price has strong upside

We have used the sum-of-the-parts (SOTP) method to value Marg. Karaikal Port is valued at Rs 171 based on the DCF, while the EPC business is valued at Rs 10 based on P/E of 6x. SEZ and real estate are valued at Rs 109 based on NAV, while the land bank, where there are no near-term development plans, is valued at a book value of Rs 53. Hence, we arrive at a fair value of Rs 353 and initiate coverage on Marg with a valuation grade of '5/5', indicating that the market price of Rs 189 has 'strong upside' from its current levels.