Little known Megha Engineering beats the Goliaths of the infra space

MEIL is set to construct the Zojila tunnel project in Jammu & Kashmir
When Hyderabad-based Megha Engineering & Infrastructure Ltd (MEIL) announced last week that it has bagged the Rs 4,509.5 crore tunneling contract for the prestigious Zojila project in Jammu & Kashmir, not much was known about the company. It has, however, become one of the fastest growing and most successful infrastructure and EPC (government-funded contract) companies in the country in recent times.

The company's revenues have nearly quadrupled in the past five years from Rs 5,200 crore in FY14 to Rs 20,300 crore in FY19. During the same period, its net profit jumped nearly 6x to around Rs 2,800 crore in FY19 from Rs 500 crore in FY14. This makes MEIL India’s largest construction and engineering company after Larsen & Toubro. L&T’s infrastructure division reported revenues of Rs 73,000 crore in FY19 and profit before interest & taxes (PBIT) of about Rs 5,400 crore. 

L&T Infrastructure division revenues doubled between FY14 and FY19, against a 4x rise in MEIL revenues during the same period. MEIL is, however, growing at a much faster clip due to its lower base. The other reason is also the large number of projects the company has undertaken recently. Led by PP Reddy as its chairman and son-in-law Krishna Reddy the managing director, it started off as a small fabrication unit in 1989, but is now in the areas of power, irrigation, drinking water, roads and hydrocarbons.

It has a Rs 4,358 crore contract in the Rs 55,548-crore Polavaram multipurpose project. The company won a headworks and hydropower station contract in a reverse bidding after the Andhra Pradesh government cancelled the earlier contract. MEIL took up the project for Rs 4,358 crore, which was 12.6 per cent lower than earlier bid. MEIL was the sole bidder in the second round. The Polavaram project will supply irrigation water for 720,000 acres, 960 Mw hydropower and lift 80 TMC of water to the Prakasam Barrage on the Krishna river.

Another project that it completed in 2017 was the one by Western UP Power Transmission Corporation Ltd involving the erection of seven substations and transmission lines for a total length of 1,116 circuit km. The project was executed on BOOT (Build-Own-Operate-Transfer) basis with a maintenance of 35 years. The WUPPTCL Project was completed in 2017 at a cost of Rs 4,150 crore.  

Andhra Pradesh and Telangana accounted for about 59.6 per cent of its unexecuted order book. In terms of sectors, irrigation-based orders, along with drinking water orders, made up nearly two-third of its order book, though the firm has now diversified into oil & gas and power sectors. It has also made an acquisition to enter defence sector and plans to set-up a thermal power plant.

MEIL's annual finances suggests that it has grown without compromising its profitability or balance sheet, unlike many of its peers in the EPC industry.

The company’s operating margins improved from 11.7 per cent in FY14 to 16.6 per cent in FY19. In the same period its PBIT margins was up nearly 300 basis points from 11.3 per cent to 14.2 per cent. One basis point is a hundredth of a per cent. In comparison, L&T reported PBIT margin of 7.4 per cent in its infrastructure division in FY19, down from 9.7 per cent in FY14.

MEIL has one the best debt servicing ratios in the industry with an interest coverage of 20x in FY19, according to calculations by Business Standard. In other words, its operating profit or EBITDA in FY19 was equivalent 20 times its annual interest liability. This is attributed to its strong cash flows from operations alleviating the need to borrow to fund operations. 

“MEIL has been reporting strong cash flows from operations majorly on account of cash flows from power transmission project along with the stringent cash flow management,” write analysts at India Ratings in their latest rating report on the company.  

 The company reported a gross debt-to-equity ratio of 0.9x in FY19 down from 2.1x five years ago according to calculations. Its return on equity-–a key measure of profitability and capital efficiency-–was 27.4 per cent, which is quite high by industry standards.

The numbers, however, suggests that the firm has now hit a growth hurdle after fast-paced growth between FY14 and FY18. 

According to data from India Ratings, MEIL reported revenues of Rs 18,040 crore in FY20 (provisional), marginally down from Rs 18,320 in FY18. In the same period, its net profit was down around 20 per cent to Rs 2,580 crore.

According to India Ratings, MEIL’s revenue visibility remains strong, with a closing order book of Rs 88,080 crore as of March 2020, equivalent to 4.9x of its FY20 revenue. The company booked fresh orders worth Rs 30,870 crore last fiscal. 


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