Markolines Pavement Technologies Ltd
MCAP: 251 cr | PE: 15.7 | BV: 45 | Price: 131 | Promoter holding: 72%
Business
O&M provider for highways.
Highway Maintenance
- Asphalt overlay — Add a new layer of asphalt to increase lifespan.
- Crack sealing — Filling cracks
- Joint maintenance – repairing joints between concrete slabs.
- Drainage cleaning
Highway Repair
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Routine repair – patching potholes, fixing minor cracks, any other issues
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Cold in place recycling - Rejuvenating existing asphalt pavement by milling it, mixing it with rejuvenators, and repaving it, reducing waste and costs.
- Benefits - Reduced material usage, less waste generation, cost effective (low material usage, less transport cost, faster, longer lifespan, however costlier equipment). Higher quality repair. Versatile
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Micro surfacing - Applying a thin layer of asphalt and polymer emulsion to improve skid resistance and pavement texture.
- Their PPT claims Markolines to be the first company which introduced this tech to india. I found this to be inaccurate.
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M&R projects have a project period of 4 to 12 months.
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Markolines does site analysis, creates camp for employees and then starts with the work.
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H1 is impacted by monsoons. Continuous monsoon impacted H1Fy24. Impact on H1fy23 was lesser compared to h1fy24.
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Margins should remain intact as they take contracts on a “cost plus” basis.
Tunneling
Tunnel construction in hilly areas. New segment.
Slightly higher margin as compared to maintenance and repair.
Larger and longer projects typically.
For the J & K tunnel project they have a stake of 25%. It’s a large project and multiple contractors are working on this.
Soil Stabilization
Part of road construction.
Soil stabilization involves treating and strengthening the soil beneath a road to improve its bearing capacity and prevent premature pavement failure. This can involve techniques like:
- Mechanical stabilization: Mixing the soil with aggregates or binders to improve its mechanical properties.
- Chemical stabilization: Adding chemicals like lime or cement to bind the soil particles and increase its strength.
- Reinforcement: Using geotextiles or grids to reinforce the soil and prevent erosion.
Performance Guarantee
- Markolines also provides 2 years defect liability (“warranty”).
- Markolines also provides a performance guarantee of 5%. i.e. Markolines will forfeit 5% of the contract value if their work quality isn’t acceptable. So far, this hasn’t happened as per concall Nov '23.
Operations Geography
Mostly Maharasthra. Serves multiple other states.
One tunnel project in J & K.
Outsourcing of Contracts
Markolines also does outsourcing of orders if they can’t fulfill it themselves. The margins are slightly lower in this scenario for obvious reasons. The cost of this is reflected in other expenses. In house fulfillment of orders has the cost reflected in material consumed.
There are multiple ongoing litigations where Markoline had outsourced the contract but the contract receiver either didn’t pay back or didn’t complete the work. Source: Right issue document.
Government Involvement / Receivables Concern
- Markolines doesn’t directly deal with the government. Markolines gets orders from NHAI or private players. Markolines’s Management has repeatedly mentioned that they work very transparently with the clients
- As per the management they work with reputed private players and don’t expect that there will be bad receivables.
- They avoid direct contracts from NHAI because for government contracts there is a lot of interference, influences or local competition, and particularly, it goes on the cost basis.
Billing is done directly to the client on a monthly basis. Mobilization of machinery + initial setup takes 40 to 50 days => first billing happens in 70-90days
Reviews
- As per Mgmt, they are the preferred vendor and most of the InvITs as their offerings are more comprehensive than peers.
- Google maps rating of 4.4 (Doesn’t add value to the thesis. Had it been 2* would it have been a concern?)
Market
- Unquantifiable due to lack of data.
- Road construction companies operate in PPP and do the repair and maintenance themselves. Markolines is just a private player who offers O&M services if a private player of NHAI wants to outsource it.
- The equipment for road construction differs from what’s required for maintenance.
Competition
- The road construction companies have their in-house operations and maintenance arm.
- As per the Management this is a very fragmented industry and they are the largest players and they don’t see any large competitors.
Management
Vijay Oswal
Sanjay Patil
They have been versatile with the business they are in.
Remuneration
1.5cr total against 16 cr profit.
RPTs
They own 3 private related companies - . Markolines Infra Private Limited & Markolines Technologies Private Limited Unique
UHPC Markolines LLP (Associate) – (Markolines public has invested or loaned 8.3 cr into it. Markolines public got 0.2cr interest). Markolines public holds 50% stake in it.
No significant RPT between Marolines and these pvt companies.
Valuation
PE of 15. Mcap 257cr
Borrowing of 50cr, Payables 32, Receivables 108 → is quite high as compared to the net profit.
Order book is around 500 cr. ~170 of it is for the tunneling projects which take 1-2 years for completion. The remaining 330+ cr of it is for highway repair/maintenance.
My estimate for H2FY24 is 200cr revenue, 10% EBITDA margin. Expected FY24 PE to be 14.4
Thesis
- Fixed assets increased from 10 to 26cr in one year coupled with a larger order book of 400cr+. & low PE makes it attractive.
- Possibility of tailwinds, because highway construction has increased significantly since the past 5+ years and highway roads require maintenance after 5 years.
- Management expects very good growth (number not provided) for H2FY24.
- They have ventured into new businesses like Tunneling, Soil Stabilization, Full Depth Reclamation. They have good initial success in Tunneling.
- OTOH, why did they have to venture into multiple businesses instead of focusing on expanding on maintenance & repair?
Antithesis
- No visibility in TAM.
- Working capital intensive business with low EBITDA margins.
- Business is heavily influenced by external variables like the Government’s willingness to spend, regional politics & favoritism, monsoons.
Disclaimer: I hold no position in this company. Making this post to invite collaborators.
