JMC Projects

Investors with a penchant for risk can consider buying the stock of JMC Projects, a diversified construction contractor. At Rs 186, the stock trades at 11 times its trailing 12-month per share earnings, on a par with peers in the construction space. Given its small-cap status, investors are advised to buy the stock in phases based on price dips linked to broad markets.

JMC has expertise in varied segments such as roads, bridges, power, industrial construction and housing and commercial construction. A healthy order-book, tie-ups with bigger companies for better projects, repeat orders from clients, kick-off into build-own-operate projects are other factors that boost the prospects of this company. Increased infrastructure spending by the Government will also benefit order inflows.

JMC undertakes construction contracts in a variety of segments. It constructs plants for industries such as automobiles, textiles, pharmaceuticals, and so on. Real-estate projects constitute commercial, office and residential complexes, hospitals and hotels. Infrastructure contracts take the form of road projects, bridges, bus terminals besides contracts in the power segment.

Order book

It enjoys healthy relationships with its clients, the likes of which include BHEL, Larsen & Toubro, besides government bodies such as Bangalore Development Authority, Maharashtra State Road Development Corporation and so on. It also partners companies such as Sadbhav Engineering, which could help it secure bigger contracts besides enhancing own track record and expertise. Increased outlay on the part of the Government to develop urban infrastructure will help order inflow. The company plans to move into the rather less competitive north-east regions, which may help it secure more orders at perhaps superior profit margins.

Fresh order inflow slowed in 2008-09, with the outstanding order book 15 per cent lower at Rs 1,810 crore as of March 09 against the value in March 2008.

Since then, however, order inflow has picked up, currently valued at about Rs 2,955 crore. At about 60 per cent, industrial and real estate projects take up the majority of the order book.

Power projects account for a further 24 per cent, with the balance taken up by infrastructure projects. The order book is a tad more than twice the revenues clocked in 2008-09, and with an execution period of 24 to 30 months, provide medium-term earnings visibility.

In its bid to increase focus on infrastructure, JMC, in consortium with SREI Infrastructure, has won a road construction contract from NHAI on a build-own-operate basis. With a cost of Rs 1,000 crore and an execution period of 36 months, the project is located in Haryana. However, given its long execution period, revenues flowing from this contract have not been factored.

Financials

JMC more than doubled revenues between 2006-07 and 2008-09. In the period of slowdown in 2008-09, the company still clocked net profit growth of 20 per cent in the year. On the margins front, operating margins for 2008-09 have been maintained at 8 per cent.

But as a result of high depreciation and interest costs, margins slipped to 3 per cent at the net level. Increase in investments in plant and machinery, and higher rates charged on some machinery accounted for the spike in depreciation costs. Such investments would however ensure timely availability of equipment. Interest costs doubled in 2008-09 over the previous year, following an increase in debt.

On the funding side, the company concluded a rights issue in the September 09 quarter, raising about Rs 39 crore which funded working capital. Inventory and working capital turnover also remain quite robust at 14 times and 7 times respectively, boding well for the company's execution abilities.

Having recorded impressive revenue growth in 2008-09, JMC suffered a delayed effect of the slowdown. With order inflow slipping, the half-year period ending September 2009 saw a dip in sales by about 6 per cent. This, coupled with higher interest and depreciation outgo, made a dent of 17 per cent in net profits.

Improvement came about in the December 2009 quarter, which saw a 9 per cent increase in sales and a 43 per cent increase in profits on the backs of sustained reduction in interest costs.

With a higher interest rate cycle in the offing, increase in interest costs is quite likely. The debt-equity ratio is on the high side at 0.8 times. Interest and debt, therefore, remain key concern areas.

However, interest cover is rather comfortable at about four times. As a percentage of sales too, interest costs are at about 2 per cent.

via BL

JMC Projects

JMC Projects has managed a successful turnaround, transitioning from a company with eroding net worth to one with a strong balance sheet in two years. Investors can consider exposure in the stock with a 2-3 year perspective. A strong order book, improving financials, enhanced bidding capacity and a strong corporate promoter who is actively involved in the management, buttress our recommendation.

At the current market price of Rs 373, the stock trades at 13 times its expected earnings for 2008-09. The stock has a small market cap of Rs 680 crore and may be subject to sharp volatility linked to movements in broad markets, necessitating phased investments.

From posting net losses in 2005, JMC Projects has returned to profitability in 2007 on the back of restructuring measures. The company reduced the proportion of fixed price contracts and passed on the burden of raw material costs to project owners. Wherever it had to undertake supply of raw materials, the company ensured that it has price escalation clauses built into contracts.

Two, JMC received a healthy infusion of equity through issue of warrants and rights offers. Three, with Kalpataru Power Transmission becoming a corporate promoter (JMC became Kalpataru’s subsidiary in February 2007), the company has received cash infusion and full support from the former, which has helped it capitalise on the opportunities in the infrastructure space.

The above measures resulted in efficient cost management, substantial reduction of debt, improved bidding capacity (as a result of higher net worth) and entry into newer areas of infrastructure such as civil works for power projects.

JMC Projects had an order book of Rs 2,100 crore in December 2007, with infrastructure accounting for about 40 per cent and civil and power projects for the rest. While the order book of over four times sales for FY 2007 does appear challenging, change in management, doubling of workforce and a 54 per cent increase in asset base in 2007 suggest that the company has been preparing to face execution challenges.

Given JMC’s strength in civil construction, the company may be among the beneficiaries of the recent increase in Budget allocation for urban infrastructure, drinking water and sanitation development projects to be taken up by the States. We believe that orders in these segments would be more in number but less in terms of value, involving higher participation by mid-sized companies such as JMC.

While Kalpataru appears to view JMC as a partner to supplement its own skills in the civil and infrastructure space, any move by Kalpataru to merge JMC remains a key risk, as the returns in that event will depend on the swap ratio.

Edelweiss - Kalpataru Power Transmission, JMC Projects

Edelweiss - Kalpataru Power Transmission, JMC Projects

Geojit - JMC Projects, Geojit - Kalpataru Power

Geojit - JMC ProjectsGeojit - Kalpataru Power

Finquest - JMC Projects

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