In the case of Madhucon, which is primarily into engineering, procurement and construction (EPC) contracts for roads, power and irrigation, coal mining is handled through a 95% subsidiary, PT Madhucon Indonesia. It won its second coal mining licence for around 30,970ha in Sumatra, the first one being for 10,000ha procured in 2006.

For Madhucon, the strategic move perhaps stems from its ambitious plans to generate around 1,920MW of thermal power through another subsidiary. Around 40% of the coal will be imported for captive requirements within the group in thermal power and co-generation.

The reasons are not different from those stated by most Indian firms making a beeline for mining in East Asia—shortage of coal in India and the relatively higher energy, or calorific, value of coal, and cheap labour.

However, it is too early to gauge the results from the second licence until feasibility studies are conducted. At best, one can draw inferences from the company’s experience in its first venture there. After four years, in 2009-10, the first mine will produce around 50,000 tonnes, which will scale up to around 1.5 million tonnes in 2010-11. Senior management officials peg the costs at Rs125 crore to mine a million tonnes, also saying an investment of about Rs90 crore being made so far.

Investments in coal mining will reflect in Madhucon by way of the earnings value assigned to the subsidiary in its consolidated books. But it hinges on the revenue model and sale price of its coal and on realizations. One concern is that the differential pricing adopted for 40% of its output which is for captive use could eat into profitability of the mining entity and impact consolidated profits. Would there be a tendency by the management to subsidize coal price for its thermal power project to ensure the latter’s profitability?

For now, these uncertainties cloud Madhucon’s valuations. Adding to this is the proposed business restructuring whereby all EPC businesses will be housed in the holding company, and a new entity, Madhucon Infrastructures, will hold assets such as toll roads, power projects and even coal.

Madhucon Projects has a strong order book of Rs4,014 crore, spread across power, road and irrigation contracts, around four times its projected 2009-10 revenues. But execution issues and cost pressures had margins in the December 2009 quarter. A clearer picture on all these fronts would perhaps emerge in the first quarter of 2010-11. It’s too early to get excited.

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