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Key Points
1) JKIL’s operations have overhauled their traditional road & bridges infra projects to now being focused on metro infra, which we believe is a market with Rs. 4-5 lakh crore opportunity size and only a handful entities (<10) with this domain expertise.
2) Concentrated order book of ₹ 8,657 Cr as on 30th September, 2017 predominantly comprising of Mumbai metro projects aiding strong revenue visibility and possibility of better margins due to better logistics and operational efficiencies due to presence of all projects in JKIL’s home city.
3) High Growth phase: initialization of metro projects yields relatively lower toplines, however in the 2nd phase of construction revenue realizations increase substantially. Currently JKIL is at a sweet spot whereby Q3FY18 onwards most of its marquee projects shall be in the 2nd phase.
4) JKIL has no BOT (Built-Operate-Transfer) contracts, all contracts are EPC contracts (Engineering, Procurement, and Construction) with payments scheduled on monthly basis (RA Bill format) thus aiding better cash flow.
5) Recently SEBI had recognized JKIL as a shell company, alongside 330 other companies however, SEBI does not disclose on what basis the Ministry of Corporate Affairs (MCA) has classified these companies as ‘shell companies’ and we do not find anything dubious about JKIL’s operations . Almost entire order book of JKIL is from government entities & all undertaken projects are being executed confirmed by our site visits at the construction sites.
Our Take
We believe that JKIL is in a sweet spot right now with a strong order book, revenue visibility, large opportunity size, few peers, domain expertise and No BOT only EPC. Currently at a price of Rs. 320/Sahre JKIL is valued at 7.6x FY 20 estimate of a PAT of Rs.283 Crs. ie. EPS of ~Rs.37. We recommend to BUY this stock and assign a P/E multiple of 12x FY20E earnings and arrive at a target price of Rs.444 / share implying an upside of 57% from current levels in 12-18 months time frame.
Company Background
Started by Jagdishkumar Gupta as a PWD contractor, J. Kumar Infraprojects (JKIL) is an infrastructure development company with a primary focus on development of metros, roads, flyovers, bridges, irrigation projects and civil buildings. The company commenced its operations in 1980 with an order of ₹ 30,000 which has now grown into a major player in the transportation sector with an outstanding order book of ₹ 8,657 Cr as on 30th September, 2017.
JKIL has a good track record with execution of projects such as Mumbai – Monorail, Delhi Metro, Sion – Panvel Highway, Ahemdabad BRTS, Sabarmati River and various flyovers and skywalks in Mumbai to name a few.
With regards to the company’s work ethics and culture, it has depicted a strong employee base of 3,429 permanent employees who have completed more than a decade with JKIL. A meeting with the CFO, Mr. Arvind Gupta and other operational personnel reinforced the same.
Some of the factors like key equipment ownership, limited sub-contracting and swift execution has helped JKIL to take a lead in the infrastructure space.
Business Vertical
1. Transportation Engineering Segment(~ 95% of revenues)
With over two decades of experience in the transportation engineering segment, JKIL gets its majority revenue (~ 95%) from here. The company undertakes client specific requirements of their designs and construction projects on a turnkey basis with an average execution period of 2 to 5 years. JKIL is currently executing metro rail projects in Delhi, Mumbai, Ahmedabad and Navi Mumbai. The metro segment contributes 72% to the company’s order book with Mumbai Metro solely contributing ~70%.
2. Civil Construction Segment
JKIL’s offerings in this segment include both commercial and residential buildings. Some of the notable works include modernization of border check posts at 22 locations in Maharashtra, construction of swimming pool in HR Johnson Tile company, construction of Olympic size pool in Goregaon Sports Complex and many more. The current outstanding order book from Uttar Pradesh is ₹ 176.79 Cr.
3. Irrigation Segment
JKIL undertakes irrigation projects for various corporations like Vidharbh Irrigation Development Corporation, Pimpri Irrigation Division, Yavatmal Bambla Canal Division for construction of dams, canals, aqueducts & irrigation tanks, spillways etc. The company’s outstanding order book in this segment from Maharashtra is ₹ 75.90 Cr.
4. Piling Segment
JKIL entered this segment in FY06 by acquiring hydraulic piling rigs. Currently, it has 42 such rigs which are used
to build pile foundations for buildings and flyovers, marine structures, offshore platforms etc. This segment caters
to major real estate and infrastructure companies. However, since all of the piling rigs are required by the company due to abundance of work, this segment has no outstanding order and shall marginally contributed to JKIL’s revenue in FY18 (~1.5%).
Investment Rationale
1. 4-5 Lakh crore opportunity size of Indian Metro and leadership of JKIL in the segment. India has 8 metro rail networks covering a length of 370 km operational in the country and over 24 more projects lined up. The government policy requires every city with a population of above 1 million to be facilitated with a metro. This brings cities like Pune, Nagpur, Ahmedabad, Chennai, Vijayawada, Kozhikode, Indore, Bhopal, Patna, Guwahati, Kanpur and Varanasi under the urban development ministry to be accommodated with a metro. Metro rail construction requires special expertise with only 8 to 10 players in the market capitalizing this opportunity namely, Simplex, L&T, NCC, JMC, TPL-CHEC and other small players. Companies taking up BOT (Built-OperateTransfer) contracts have mismanaged their balance sheets and have high leverage due to delay in the project executions. JKIL traditionally has only taken up EPC contracts (Engineering, Procurement, and Construction) with payments scheduled on monthly basis (RA Bill format) and shall continue to do so. MMRDA grants 10% of the order value as an interest free advance to the constructor in order to enable smooth and timely commencement of the project. With the successful completion of Delhi metro, most of the major cities in India have either announced or have already started building metro projects. With the commissioning of 19 new sections in 9 cities adding 330 km -370 km of metro rail networks before the parliamentary elections next year, government plans to showcase their execution capabilities in metro rail as a major election pitch in urban areas. The budgetary provision between 2012 and 2015 for metro projects was ₹16,565 cr, which has been increased to ₹ 42,696 Cr during 2015-18. Key metro rail projects in India
2. Successful execution capabilities with healthy order book
JKIL went public in FY08 and became one of the leading transportation contractors in Mumbai by expanding into newer sub-segments, complex jobs and higher-value contracts. JKIL has largely operated in the Northern-Western belt viz. Maharashtra, Delhi, Gujarat, Rajasthan and Uttar Pradesh.
With the successful completion of the Delhi metro by JKIL, government has gained confidence in the JKILs execution capability and quality of work. Delhi metro which is located at the heart of the nation, passing through cramped areas like chandni chowk and noticed daily by the political leaders; was a huge challenge for the company.
When the government announced the Mumbai metro line 3, an underground metro rail project starting from Cuffe Parade to Aarey Depot, a total 33km stretch with a budget of ₹ 23,167 Cr only 2 players (L&T and JKIL) were allowed to bid for 2 packages with the remaining players only allowed to bid for 1 package. JKIL had bid for Package 5 & 6 & got an order worth ₹ 4,935 Cr dragging their order book growth by ~ 120% in FY17. Line 3 order is about to be executed in next 4 ½ years and company expects an addition of at least ₹ 1000 Cr worth of new orders every year. Given the companies past record, the current order book gives very strong revenue visibility.
Over the years, the company demonstrated strong financial discipline by keeping financial leverage under control, steadily increasing order ticket size and maintaining stable EBITDA margin by optimally utilizing its resources. Concentrating on region specific areas have helped maintain profitability and reduce debt. In FY09-10 when the revenue were restricted from the geographical regions of Maharashtra, company ventured into the North-Western belt which were able to suffice its revenue growth targets. Now, when the company is getting most of its work for the home town, JKIL has a better proximity to resources in and around Mumbai translating into better utilization.
3. Mumbai Metro work line - 2A, 3 & 7 to be on a fast track
A tepid start in H1 FY18, contributing ~ ₹ 270 Cr by the Mumbai Metro Projects – line 2A, line 3 and line 7 due to quarries in the Thane-Turbhe region which led to shortage of raw material is all resolved. The issue has been solved by going 60km far from its plant, rather than sourcing it from Thurbe which was located 40km away, with a negligible impact on the cost.
Also when a metro project is awarded, the first 6 months of the operations are commenced at a slower rate with pace of work picking up later on. An elevated metro project takes around 30 months for completion while an underground metro can take up to 4 – 5 years from the date the projects are awarded to the company. A key risk includes execution and completion of these projects on a timely manner. While JKIL has done well over the past couple of years, it has yet to demonstrate its execution capabilities in new segments (Line 3 – underground metro rail) and geographies that the company is entering.
For Line 3, JKIL has recently increased its machinery to 6 TBMs (Tunnel Boring Machines) and is awaiting a delivery of one more TBM. TBM machine costs ~ 70-80 Cr per machine which has increased their debt to ~ ₹ 550 Cr as on September, 2017. For the metro order, JKIL expects to incur a capex of ~ ₹180 to 250 crores for TBMs which is less than 5% of the total project order. Capex of ₹ 108 Cr has been accounted for in H1 FY18. An operating track record of nearly 20 years coupled with a no-lease policy has enabled the company build an extensive machinery bank essential to carry out complex construction activities.
Revenue guidance by the management
4. Bidding for new projects in Mumbai Metro
JKIL had recently bid for line 2B (project cost of ₹ 10,986 Cr) and line 4 (project cost of ₹ 14,549 Cr) however, line 2B has been awarded to Simplex while the announcement for line 4 is expected in the coming few weeks. While the estimated cost of Line 1-4 and line 7 was ~ ₹ 64,000 Cr, the cost for line 5, line 6 and line 8 is yet to be decided. The ₹ 64,000 Cr. worth project tenders that the MMRDA is expected to float for Mumbai Metro alone is only a drop in the sea of infra spending that the Maharashtra State government has lined up.
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