This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.

MUDAJAYA Group Bhd’s independent power plant project in Chhattisgarh, India, looks set to be commissioned by year-end after a long delay. Should things pan out, the plant would provide a much-needed boost to the construction outfit’s earnings next year (it has been in the red since the fourth quarter of last year).

According to an executive close to Mudajaya (fundamental: 0.35; valuation: 0.90), the group — through its 26%-owned associate company RKM Powergen Pvt Ltd — has ironed out all issues plaguing the project in north-eastern India, which had missed several deadlines since 2013.

The group’s local partner, RK Powergen Pvt Ltd, holds the remaining 74% stake in RKM Powergen.

“The first phase of the power plant will be commissioned within the next two months. Mudajaya has secured all the necessary approvals and coal supply agreement to start operating the first phase,” says a Mudajaya executive, who declined to be named.

According to analysts, the group is targeting annual earnings of between RM60 million and RM70 million from the 4x360mw power plant upon the commissioning of the entire project.

The persistent delays have been the bane of Mudajaya. The company, which specialises in the building of power plants, was once analysts’ top pick in the construction sector amid anticipation of steady earnings and cash flow from the Chhattisgarh plant, in addition to profits from engineering works.

The project’s construction cost amounted to RM4.8 billion. MIPP International Ltd, an 80%-owned subsidiary of Mudajaya, was awarded the equipment procurement (EP) contract — worth about RM3.4 billion — for the plant by RKM Powergen.

Profits from the EP contract has been realised since the financial year ended Dec 31, 2007 (FY2007). That year, Mudajaya’s net profit leaped 91.6% year on year to RM30.14 million, of which RM11.3 million was from the EP contract.

The group enjoyed robust earnings growth between FY2007 and FY2012, with its net profit expanding at an average annual rate of 60.9%. It posted a net profit of RM237 million in FY2012. However, its stratospheric levels of earnings growth has halted since then.

In FY2014, Mudajaya slipped into the red — the first time since it was listed on Bursa Malaysia in 2004 — with a net loss of RM70.2 million. Its share price has been on a downward trend, falling from RM2.90 early last year to a six-year low of 85 sen in mid-August this year. It regained some lost ground recently to close at RM1.04 last Thursday.

Apart from the absence of contribution from India, cost overruns in some of Mudajaya’s projects in Malaysia also negatively affected its financial performance. Furthermore, its fast-depleting construction order book did not help matters.

The group managed to secure only RM55 million worth of new jobs in FY2014. But it appears to have seen some improvements this year — outstanding orders currently stand at RM640 million, with RM533 million jobs secured this year.

“While this provides a temporary reprieve, the catch here is that the new order book level will not last it more than 1½ years, given the annualised burn rate of RM450 million,” CIMB Research analyst Sharizan Rosely says in a research note dated Sept 15.

In June this year, there were rumours that Mudajaya was looking to sell its power generation assets in India and Malaysia. The reason given was that the group wanted to focus on its construction and property development businesses.

After its annual general meeting on June 17 this year, Mudajaya CEO James Wong said there were no plans to sell its power assets. However, he also said that everything is for sale if the price is right.

An analyst who tracks the company opines that it does not matter whether the Chhattisgarh plant commences operations by year-end or early next year as Mudajaya would only be able to recognise the full-year earnings from next year onwards.

Initially, the first phase of the project was expected to be commissioned in 2013. In September and October that year, RKM Powergen and Coal India Ltd signed fuel supply agreements whereby the independent power producer would buy six million tonnes of coal per year from Coal India at US$25 per tonne.

At first, things appeared to go smoothly for RKM Powergen. However, several issues later arose in the supply and transport of the coal as well as the construction and synchronising of the power plant with the grid.

These issues resulted in a delay in the completion and commissioning of the first phase. The completion date was subsequently deferred several times, with the latest deadline by the end of this year.

“Basically, the delays were not 100% their (Mudajaya’s) doing. There were several issues with regard to the shipments, construction and issues of them synchronising the plant with the power grid.

“So, they had to spend some time synchronising with the grid. There were also some logistics issues in regard to the transport of the coal. They needed a reliable rail connection to connect their plant with the rail line,” says the analyst who covers Mudajaya.

The depreciating rupee also added to RKM Powergen’s problem. The currency’s depreciation over the years has substantially raised the company’s cost, says the Mudajaya executive. The rupee has depreciated by 34% since January 2009.

However, RKM Powergen has managed to secure a new financing package from the banks, the executive reveals. He says the paperwork was completed two weeks ago, and the funds will be available for withdrawal after next week.

“RKM Powergen will then be able to pay the upfront payment needed for its coal supply,” the executive adds.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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