J Kumar Infraprojects’ (JKIL) Q1FY17 revenue, at Rs 4 bn, spurted 11% y-o-y with work picking up in flyover projects in the Mumbai region. Ebitda margin stood at 16.9% y-o-y. With capital costs remaining in control, PAT rose 16% y-o-y to Rs 295 m. The company has formally received the much-delayed Mumbai Metro Line 3 (Rs 50 bn) and Line 7 (Rs 3 6 bn) projects, while agreement signing for Line 2A project (Rs 13.5 bn) is expected shortly. Ground work on all the 3 metro projects has already started. Delays in award of the metro projects and our conservative stance on execution ramp up results in 4%/7% cut in FY17/18e earnings. However, we believe JKIL remains one of the best bets in the EPC space owing to strong revenue visibility (book-to-bill at 7x), healthy balance sheet (net debt:equity at 0.1x) and attractive valuations (trading at 6.5x FY18E P/E). Maintain buy with revised target price of Rs 372 (Rs 400 earlier).
Execution picks up; interest cost falls
Execution on the JNPT projects, Ahmedabad metro and flyover projects in Mumbai picked up, leading to top line beat (Rs 3.9 bn estimate). Aided by 8% fall in interest expenses and high other income (up 118% y-o-y), PAT grew 16% y-o-y to Rs 295 m (Rs 288 m estimate).
Mumbai Metro projects formally awarded
JKIL has signed the agreement for Mumbai Metro Line 3 and Line 7 projects. Management expects agreement signing for Line 2A project over next couple of weeks with work on all three projects expected to start in full swing post monsoons. Including the Line 2A project, the company’s order book stands at Rs 100 bn (7x TTM revenues) and provides strong revenue visibility.
Outlook and valuations: Attractive; maintain buy
A robust balance sheet, bulging order book and niche presence in urban infra space makes us positive on JKIL. We believe extraneous factors which had delayed formal award of metro projects are behind us and expect execution to gain traction going ahead. With 30% plus EPS CAGR over FY16-18E, JKIL is trading at attractive valuations of 6.5x FY18e earnings. We maintain buy with revised TP of Rs 372 (15x FY18E EPS).
Debt at Q1FY17 end stood at Rs 3.6 bn with near similar levels of cash/liquid investments.
Large upcoming opportunities: Management is currently focusing on ensuring that execution on large value projects like the Mumbai Metro and JNPT, which have recently started, gathers pace before it bids for new projects. Hence, JKIL will be going relatively slow on order accretion front over next 1-2 quarters. In the medium term however, the company expects to win high value urban transport projects (roads, metro rail) in its focus area of Maharashtra, Gujarat, Rajasthan and Delhi. Some of the marquee projects expected to be awarded over next 1-2 years include the Mumbai Trans Harbour Link, Mumbai Coastal Road, Mumbai Metro Line 2B project, Delhi Metro Phase IV,
Mumbai Nagpur Expressway, etc. Cumulative size of these projects is Rs 1 trn.
JKIL is a civil engineering and infrastructure development company with primary focus on development of roads, flyovers, bridges, metro projects, bridges, irrigation projects, commercial and residential buildings, railway buildings, sports complexes, etc. It also undertakes the piling of foundation work using hydraulic piling rigs for major projects which are awarded to other contractors. With over two decades of experience, it has established a track record of efficient project management and execution skills with trained and skilled manpower, efficient deployment of equipment and strategic purchasing capabilities. JKIL went public in January 2008, with a public issue of 6.5 million shares at a price of R110/per share aggregating Rs 715m. The issue proceeds were utilised for meeting the company’s capex and working capital requirements. It also raised
Rs 555 m via a QIP in December 2009, issuing 3.1 mn shares at Rs 180.25/share.
JKIL, primarily present in the transportation (roads, metro, bridges and flyovers) space, has been on a high growth trajectory, posting a revenue and PAT CAGR of 53% each over FY07-12. Robust revenue visibility and diversification into new segments and geographies will be the springboard of stable growth in the future. The company’s operating margins, leverage and working capital are amongst the best in the industry, so are its return ratios (RoE upwards of 16%). The reason behind the company’s high margins is its strategy of not sub-contracting work to smaller contractors. Management has stressed that operating margin will not be sacrificed at the altar of revenue growth. Also, JKIL is steering clear of BOT projects as it aims to keep its balance sheet light. Ergo, its Rs oE is expected to inch closer to 20% in the future.