Wednesday, February 13, 2008

Madhucon – de-risking through subsidiary

Madhucon Projects’ (Nama Nageswara Rao, Chairman & MD) plan to transfer its build, operate, transfer (BOT) projects in the road segment and its venture in coal mines and power to a wholly owned subsidiary may signal its intention to mitigate risks for the parent company and keep its balance sheet intact while pursuing bigger projects.
The company’s board late Monday approved a proposal to transfer 4 BOT projects valued at about Rs 250 crore totally to a wholly owned subsidiary Madhucon Infra, at an arms-length transaction. The company also plans to route investments in power and coal mines through this subsidiary. The subsidiary would be a holding company for all the above projects. The proposal is subject to approval by shareholders.

Higher investments
All the four BOT projects of Madhucon have achieved financial closure. However, given the long drawn nature of BOT contracts, further capital requirements for the same would be high. Additionally, bidding for new bigger BOT projects would also require substantial networth and funding.

By setting up a subsidiary for the BOT projects, Madhucon may essentially be creating an independent vehicle to fund these projects and mitigate risks of higher debt or equity expansion in its balance sheet. The company as an EPC player may continue to execute projects owned/bagged by the subsidiary thus securing its revenues.

Business potential
Madhucon recently acquired coal-mining licence in Malaysia. It also plans to set up a 540 MW power plant in Andhra Pradesh. These segments again necessitate huge investments that may be better handled through a separate vehicle.

All the businesses transferred to the subsidiary - BOT projects, power and coal mining hold significant business potential and if successful could provide upside to the stock of Madhucon Projects over the long term without the company having to undergo any earnings dilution in the short run.
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