Markolines Pavement Technologies Ltd Q2 FY2024 Concall Summary

Key Takeaways

• H1 hit by monsoon, H2 rebound expected: Revenue fell YoY in H1 as projects sat in regular monsoon zones, unlike last year when rain shadow projects kept work going. Management expects H2 to deliver "substantial growth in volume" and will "try" for a 60-80% jump over H1.
• Order book stands at ~₹580 crore with 1.5-2 years of visibility, but only ~50% executed over the past year. The consumptive nature of maintenance orders and multi-year tunneling projects explain the pace.
• Tunneling is the margin story: Two projects underway (Maharashtra, Jammu & Kashmir via an LLP with 25% stake), with management expecting tunneling to add 1-2% to the bottom line over 2-3 years as the company gains maturity.
• Receivables ballooned, but timing explains it: Sundry debtors jumped because major bills were submitted just before the call, particularly for BNC/MMRDA work done after the monsoon. Management says there will be no bad debts.
• What to watch next quarter: Whether the H2 volume surge materializes to the degree hinted, how quickly those large receivables convert to cash, and any concrete progress on the concrete road maintenance trials.

Business Model & Competitive Position

• Cost-plus model anchors margins: The company works transparently with private highway clients on a cost-plus basis, so profit margins are steady regardless of whether work is done in-house or outsourced. Volume growth, not margin expansion, drives bottom-line improvement.
• In-house shift changes cost mix, not profitability: Cost of materials rose because more work is being done in-house this year; previously, outsourced work put material costs under other expenses. Combining the two line items shows figures are in place, and EBITDA is stable with a slight enhancement from in-house execution.
• Private-only strategy avoids government friction: The company has decided not to enter NHAI or government contracts, citing interference, local competition, and cost-based bidding. Private clients offer assured performance, terms, and payment.
• 30% market share claimed in a fragmented space: Management estimates the private highway maintenance market at ₹1,500-2,000 crore, though it admits "there is no such data available" and the figure is "our guess." No single competitor is remotely close to 20-25% share.
• Competitive moat is breadth, not just scale: The company says it is the only one in India providing the entire spectrum of highway services, working on bundled products with composite solutions, and is a preferred vendor for funds and InvITs. Its technical center backs quality with lab testing before every site application.
• Performance record is clean: The company's performance guarantee and defect liability period obligations have never been invoked, which it attributes to credentials, performance, and quality.

Oswal: "I do not see someone so big like us, to be honest."

Seasonality & H1 Performance

• Monsoon geography drove the H1 drop: Last year, two projects were in rain shadow areas so work continued through the monsoon. This year, projects are in areas with regular monsoon, causing the H1 revenue variation. Infra companies typically see more turnover in H2.
• Receivables spike is a billing-timing issue: 80% of H1FY24 turnover sits in bills receivables because major bills were submitted just before the call, after monsoon work concluded. Management expects no bad debts from this buildup.
• Borrowings rose to fund equipment and working capital: Non-current borrowings increased for costly equipment purchases (FDR and CIPR, ~₹9-10 crore). Current borrowings rose from working capital demand loans taken for four or five major ongoing projects.
• H2 is where the year is made: An analyst suggested H2 could be 60-80% higher than H1. Management responded, "We will try for that," and separately stated there will be "substantial growth in volume" for FY24 without committing to a percentage.

Oswal: "We will try for that."

Order Book & Demand Visibility

• Order book stands at ~₹580 crore with confirmed working hand giving visibility of 1.5 to 2 years. Three to four major orders were recently finalized and added.
• Execution pace reflects business mix, not a problem: Only ~50% of the order book executed over one year because highway maintenance is consumptive (orders go hand-in-hand with consumption, typically executing in 4-12 months) and tunneling projects span 2-3 years, so percentage execution looks lower.
• Active pipeline is dynamic: The current pipeline of ₹400 crore could become ₹600 crore if new tenders open. New private clients are emerging as funds and InvITs acquire projects from domestic operators, and the company has already been awarded work from these entrants.
• Highway construction boom feeds future maintenance: Roads built now come for maintenance after 5 years. The last 5-10 years of construction, at an accelerating pace (45 km/day now vs 14 km/day a decade ago), have created huge maintenance potential that is not correlated with current construction activity.
• Concrete roads are a nascent opportunity: Concrete roads have 30-40 year life with maintenance coming after ~20 years. Pure maintenance for concrete roads built in the 1990s-2000s is only now emerging. The company is working on solutions (micro surfacing etc.) but is still in early trials.

Tunneling: The New Growth Vector

• Two projects underway: One in Maharashtra and one in Jammu & Kashmir taken in consortium with other contractors. For the J&K project, an LLP was formed with Markolines holding a 25% share; working capital provided to the LLP appears as investment on the balance sheet.
• The opportunity is large and geographic: About 30 tunnels exist on a 200-km stretch between Jammu and Kashmir alone. Hilly terrain across the country (Northeast, Nilgiris, Himalayas, Coromandel) offers huge potential in coming years.
• Margin uplift expected with maturity: Management expects tunneling to enhance the bottom line by 1-2% over the coming 2-3 years as the company gains experience. Once maturity is reached, exponential growth in tunneling can be expected.
• Revenue mix stays ~70:30 between highway maintenance and tunneling, proportional to last year. Specialized construction activities like tunneling are the lever for slight margin improvement in an otherwise cost-plus, volume-driven model.

Margins & Financial Structure

• Margins are steady by design: Because work is on a cost-plus basis, net profitability is "pretty stable." Margins contracted from ~12.3% to ~10% but management says they are "hardly varying." Volume is the primary solution for bottom-line growth, with specialized construction adding a slight kicker.
• In-house execution gives a small edge: Margins see "a little bit of enhancement" when work is done in-house versus outsourced, though the difference is not dramatic. The company tries to do as many projects as possible in-house, outsourcing only when bandwidth is stretched across multiple projects at one location.
• Bitumen price risk is contractually neutralized: All contracts carry escalation clauses, so bitumen price variation does not affect the company. Backward integration into bitumen is not considered because road maintenance specifications require bitumen from government refineries.
• Equipment strategy is mostly owned: The majority of equipment is owned; the rest is on an asset-light model renting easily available machinery. Recent equipment purchases (FDR and CIPR) drove the increase in non-current borrowings.
• Funding is adequate: The company is sufficiently funded to execute the current order book. The preferential issue announced earlier was withdrawn because it coincided with the Hindenburg/Adani report and the resulting market turmoil.

Oswal: "We work very transparently with our clients practically like we work on our cost-plus basis."

Guidance & Commitments

Key Metrics