J Kumar Infraprojects, TVS Motors, Thermax, Transport Corporation of India

J Kumar Infraprojects, TVS Motors, Thermax, Transport Corporation of India

J Kumar Infraprojects Listing

J Kumar Infraprojects will List Today

For what it's worth - lok @ Grey Market

J Kumar Infraprojects IPO Analysis

Investors can avoid subscribing to the initial public offer of J. Kumar Infraprojects (JKI). The asking price of Rs 110-120 appears stiff, given the present size of the company and the large number of unorganised players in the contracting space. Limited geographical presence, significant expansion in equity and low visibility for growth over the long term are also limiting factors for this company. However, given that the overall prospects for the company’s business appear good, investors can take a second look at the stock post-listing, if its valuation dips due to broad market factors.

At the offer band, the IPO is priced at 19-21 times its per share earnings of FY 2007 on a pre-issue equity base. Post-issue, the price-earnings multiple is 14-16 times the annualised earnings for FY-08. Similar sized peers are at a discount to this valuation.

Business and offer details

JKI, a construction company with operations in Maharashtra, focusses on building roads, flyovers, buildings and piling works. The offer proceeds (Rs 72-78 crore) are to be utilised for purchasing capital equipment and for working capital requirements. At the offer price band, the market capitalisation of the company’s stock would be Rs 228-248 crore.

Sustainability, an issue

JKI, although incorporated in 1999, started operations in 2005 and saw a huge jump in revenues in 2006. This was after one of the promoter group companies — J. Kumar & Co. — transferred certain assets as well as a contract licence for public works department. JKI’s revenue grew from Rs 3 crore in FY-05 to Rs 112 crore in FY-07. The company’s current order-book of Rs 461 crore provides earnings visibility over the next couple of years. However, the annual growth over 2006 and 2007, afforded by a low base, is unlikely to repeat itself.

The present infrastructure boom in the country provides ample room for small players such as JKI to share a part of the order flow pie. However, JKI’s current business model depends more on the local municipal and metropolitan development authorities (in Maharashtra) than on the ‘infrastructure spending’ in the country. While this strategy is likely to fetch steady revenues in the medium term, the growth opportunity appears relatively less as infrastructure players moving to high-end segments could be better options from an investment perspective. The company’s valuation can, therefore, at best be at a discount to other infrastructure players.

Concentration of work in a single State also poses the risk of slowdown if the State spending declines. The company has also not stated any plans of moving to locations outside of Maharashtra.

JKI has done well to diversify its operations from predominantly bridges and flyovers to civil construction and piling works. Piling works for larger infrastructure players are likely to provide the company with superior profit margins. The OPMs for the half-year ended September 2007 have already seen a marked increase of over 500 basis points.

While the augmented volume may also have contributed to the improved profit margins, the working-capital requirements may further tighten with more projects. The increase in the proportion of debtors (as a percentage of sales) for the half-year ended September 2007 indicates that volumes could pose pressure on working capital. Increase in secured loans and rise in interest charges also point to the mounting requirement for funds. While the offer proceeds would provide some momentary relief on this front, the company may have to find other sources to fund its projects in hand.

Emaar MGF, Reliance Power, Future Capital Holdings

Future Capital Holdings 700 to 765 540 to 550


Reliance Power 405 to 450 340 to 350


J. Kumar Infraprojects 110 to 120 25 to 30


Cords Cable Ind. 125 to 135 30 to 35


Emaar MGF 725 to 850 370 to 375

Grey Market - J Kumar, Emaar, Reliance Power

Future Capital Holdings 700 to 765 540 to 550


Reliance Power 405 to 450 300 to 350 (Off from the highs)


J. Kumar Infraprojects 110 to 120 30 to 35


Cords Cable Ind. 125 to 135 5 to 37


Emaar MGF 725 to 850 360 to 380

J Kumar Infraprojects IPO Analysis

J Kumar Infraprojects (JKIL), promoted by Jagdishkumar M Gupta and his family, is a small civil engineering company focussed on construction of roads, flyovers, civil construction of buildings, irrigation projects and piling works. Operations are largely confined in Maharashtra and to a large extent in Mumbai. The company is a registered contractor with various government agencies.

JKIL had executed transportation contracts totaling Rs 83.95 crore and civil construction work amounting to Rs 13.78 crore end March 2007. The biggest project executed was the construction of a flyover covering Kalyan Naka junction to ST Depot junction in Thane District amounting to Rs 21 crore. The company has executed some irrigation projects in the Vidarbha region. Designing and construction of four flyovers at Dr Babasaheb Ambedkar Marg in Mumbai with project cost of Rs 111.90 crore is the biggest project in its unexecuted order backlog. This project was bagged by the 50:50 joint venture with Nagarjuna Construction Company (NCC).

About 69% (37% from road, and 32% from flyovers) of the revenues were from transportation projects in the six months ended September 2007. The share of the relatively better margin civil construction was 18% and of high margin piling business about 7%.

The current IPO is to fund the purchase of capital equipments, meeting working capital requirement and to achieve the benefits of stock-exchange listing. Purchase of Rs 50.84-crore capital equipment will be completely funded from the proceeds of the issue. About Rs 18 crore of the issue proceeds will be used to meet working capital requirement.

Strengths

Order book was Rs 461.15 crore end November 2007. Orders included new contracts and unfinished contracts. The current order book translates into four times the financial year ending March 2007 (FY 2007) revenue, providing strong revenue visibility.

Piling contracts is a high-margin business. Efforts to add another four piling rigs to the current fleet of 11 piling rigs using IPO proceeds are part of the scaling up operations. Contribution of piling operations to total revenue was about 7% in the half year ended September 2007 and FY 20’07 compared with just 4% in FY 2006 and nil in FY 2005. Moreover, the piling operation is also devoid of geographical-concentration risk. If the piling contracts business, a niche segment, can be scaled up, margin can improve.

Weaknesses

As the nature of contracts handled are not very complex, there is strong competition with lots of operators. This and the small size of operations is a concern. The ability to move up to higher ticket and complex jobs has to be seen.

Most of the construction operations are centered in Mumbai or Maharashtra. The geographical concentration raises concern on order flow, linked to policy, political and financial environment in the state.

The share of low-margin transportation projects in the current order book is over 78%.

Valuation

JKIL’s sales were up 391% to Rs 112.66 crore and net profit was higher by 642% to Rs 8.01 crore in FY 2007. On post-issue equity capital of Rs 20.72 crore, EPS for FY 2007 works out to Rs 3.9. At a offer price of Rs 110 to Rs 120, P/E is 28.2 to 30.8 times. In comparison, industry peers Roman Tarmat, PBA Infrastructure and Supreme Infrastructure are available at a PE of around 20 times FY 2007 earning.

Grey Market - Reliance Power, Future Capital, J Kumar Infra Projects

Future Capital Holdings 700 to 765 570 to 580


Reliance Power 405 to 450 350 to 360


SVPCL 42 DISCOUNT


Porwal Autocomponents 75 DISCOUNT


Precision Pipes & Profiles 150 20 to 25


J. Kumar Infraprojects 110 to 120 22 to 25