The drive to ease congestion in big cities, should offer opportunities for companies such as J.Kumar Infraprojects (JKI) which have expertise in building urban infrastructure projects.

JKI executes underground and elevated metro rails, roads, flyovers and pile foundation structures through the engineering, procurement and construction (EPC) format. The company has its own large fleet of construction equipment, experienced employee base and a healthy order book.

Of the four segments (transportation, civil construction, irrigation and piling), transportation contributed the maximum (about 70 per cent) of the revenue for the year ending 2015-16. For the six months ended September 2016, the revenue contribution from the transportation segment rose to 85 per cent. With the transportation segment accounting for close to 97 per cent of the order book as on September 2016, it should retain its lion’s share in revenue. The order book size is ₹10,083 crore. Of these, metro projects, both underground and elevated, contribute nearly 70 per cent. About 98 per cent of the order book comes from government projects.

The company is well-positioned to benefit from the increasing interest of many cities to construct metro rail projects. This, along with healthy profitability and low debt levels, should translate into healthy revenue and profit growth.

The stock’s current price-to-earnings (trailing 12 month) is about 14 times, lower than its historical 3-year average of about 16 times. With strong order inflow so far in FY17 and good revenue visibility, long-term investors can buy the stock.

Strong demand outlook

Across India, metro rail systems are gaining momentum. While metro projects in major cities such as Delhi, Mumbai, Chennai and Bengaluru are getting extended further to add new lines, cities like Ahmedabad, Nagpur and Pune are in the initial stages of metro construction. JKI, being a major player in this segment, should benefit because of this increased interest in metro construction across cities.

The major order flow for the company in the current fiscal is the ₹5,012-crore phase 3 project from Mumbai Metro Rail Corporation. The total contract value of metro projects in Maharashtra under execution currently stands at ₹6,687 crore. The contract value of metro rail in Delhi and Ahmedabad stands at ₹289 crore and ₹105 crore, respectively.

JKI has completed major projects including construction of the Eastern freeway section from Panjarapol to Chembur Mankurd Link Road (₹294 crore) in Mumbai, and two elevated stations of the Delhi MRTS Phase – III Project (₹153 crore). An order book, six times 2015-16 revenue, suggests healthy growth prospects.

JKI’s decision to bid only for high-margin projects should bode well for the company’s finances in the long run. The management has indicated revenue to grow from ₹1,426 crore in 2015-16 to ₹1,700 crore in 2016-17 and further to ₹2,100 crore in 2017-18. The low debt levels (debt-to-equity of about 0.4 times as of September end) and benign interest rate environment should aid net margin which is currently around 7 per cent.

Financials

JKI’s revenue grew at an annualised rate of 11 per cent between 2011-12 and 2015-16. Revenue in the six months ended September 2016 grew 2.7 per cent y-o-y to ₹713 crore due to the slowdown in construction because of extended monsoon. The net profit increased by 11 per cent on an average annually between 2011-12 and 2015-16 to ₹103 crore. During the six months ended September 2016, net profit increased 9 per cent y-o-y to about ₹53 crore.

Risk

The risk of penalty arising from BMC’s allegations regarding poor quality road construction remains. But with ₹7 crore already paid back by JKI, the risk is mitigated to a large extent.

comment COMMENT NOW