J Kumar Infraprojects Ltd.

J Kumar Infra projects Ltd. (JKIL) is a Mumbai based infrastructure developer with a successful track record of completing marquee projects spread across the transportation, civil infra, irrigation and piling verticals. It has largely operated in the Northern-Western belt viz. Maharashtra, Delhi, Gujarat, Rajasthan and UP. As of June 2016 end, its order book stood at Rs 8,646 crore, 6.1x FY16 revenues. Of the total order book, the company has Rs 5,368 crore worth of orders bagged in July, 2016.

We met with the management of JKIL, which recently was in news for its JV being barred by the BMC on account of suspected irregularities in the repair work undertaken by the sub- contractor of the JV on a particular stretch of road in the Bandra- Dahisar route. Investors turned jittery on speculation that the MMRDA may also backlist the company leading to withdrawal of the Metro order, which the company had recently won. Consequently, the stock slumped from Rs 222 in July 2016 making a low of Rs 106 in August 2016. However, in September 2016, the MMRDA received a green signal from the Advocate General (AG) to appoint contractors blacklisted by BMC since a single authority alone cannot completely de- bar a contractor from all infrastructure related activities.

With the over-hang of the blacklisting out of sight, the stock recovered to Rs. 228 by October, 2016. We believe there is a further upside to the stock given its robust order book, high revenue visibility, consistent EBITDA margins in the range of 15-16% and debt-equity below 1x despite the execution of a lumpy order book. The urbanization spending prospects adds more optimism to the growth story. We have assigned a PE of 12x to JKIL’s estimated FY19 EPS to arrive at a target price of Rs 326, indicating an upside of 58% from the CMP of Rs 206.

 JKIL has a healthy order backlog of 6.1X FY16 sales leading to robust revenue growth:

JKIL which typically bagged orders worth Rs 1,500-1,700 crore on an annual basis has received a shot in the arm after it won the Rs 5,368 crore worth Mumbai Metro order (Andheri East-Dahisar East) stretch. Post which, JKIL’s order book has jumped from Rs. 3,214 crore as of March 2016 to Rs 8,645 crore as of June-2016.

Further it is L1 bidder for metro orders worth Rs 1,350 crore. This company is expected to receive the order in the immediate future. The metro order book has a five-year completion time line, while the remaining order book has a 2.5-3 year’s completion time frame.

Strong revenue growth on the cards:

Based on the above order, we expect revenues to grow at a CAGR of 29% to Rs. 3,052 crore by FY19 (from Rs.1,409 crore clocked in FY16).

Project wise revenue booking

Revenue Booking Value of Order Execution (%)

Contract unfinished Work (Rs. in Cr)

value work completion FY17 FY18 FY19 FY17 FY18 FY19 Name of the Project (Rs. in Cr) (Rs. in Cr) (%) Q1FY17 Q1FY17 Civil Construction

Construction of Dr. Ram Manohar Lohia Rajya

Prashasan Evem Prabandhan Academy- 260 260 0 25 55 85 65 78 78 Lucknow. Lower Wardha Mail Canal on Wardha River 93 84 9 25 40 70 15 14 28 Construction of Earthwork and Structures and Box 8 0 95 100 0 0 0 0 0 culvert of Bembla Main Canal. Construction of Earthwork and Structures of 7 1 89 100 0 0 1 0 0 Ramtirth Distributory of Bembla Main Canal. Piling Work 21 14 35 85 100 0 11 3 0

Transportation Engineering

Construction of ROB at Jogeshwari 298 57 81 100 0 0 57 0 0 Construction of Flyover at Kapurwadi Junction- 189 6 97 100 0 0 6 0 0 Thane Construction of New Creek Bridge between Thane- 184 162 12 45 95 100 61 92 9 Kalwa Construction of Flyovers at Savita Chemical 156 80 49 85 100 100 56 23 0 Junction-Ghansoli Construction of Elevated Connector B/w BKC 'G' Block & Eastern Express Highway, including 156 105 33 65 95 100 50 47 8 ROB at Level crossing near Chunabhatti Railway

Station Construction of Flyover at KSB Chowk 109 53 52 85 100 0 36 16 0 Construction of Flyovers at Meenatai Thakare Chowk,Almeida Chowk and Sant Namdev Chowk 77 71 8 35 65 100 21 23 27

Construction of Pre-cast Arch Bridges at 75 75 0 25 50 90 19 19 30 Dronagiri, Navi Mumbai. Construction of Flyover From College of 68 2 97 100 0 0 2 0 0 Engineering Pune to Patil Estate

Construction of Milan ROB Santacruz 42 5 88 100 0 0 5 0 0 Construction of Bridge Over Mulla River-Pune 31 15 53 85 100 0 10 5 0 Construction of FOB on Ghodbunder Road at 18 17 2 35 60 95 6 4 6 various locations Construction of Six Lane Bridge across Ulhas 136 136 0 20 50 85 27 41 48 creek Construction of Grade Separator at Junction- 101 101 0 20 50 80 20 30 30 Andheri Concreting of various roads in Western Suburbs 205 62 70 100 0 0 62 0 0

Roads in Cement Concrete in Western Suburbs. 194 149 23 65 90 100 81 48 19

Source: JKIL ,Ventura Research

Project wise revenue booking

Revenue Booking Value of Order Execution (%) Contract unfinished Work (Rs. in Cr) Name of the Project value work completion FY17 FY18 FY19 FY17 FY18 FY19 (Rs. in Cr) (Rs. in Cr) (%) Q1FY17 Q1FY17

Widening and improvement of Ambadi- Washind 111 65 41 75 95 100 38 22 6 road Minor Roads in 'P" ward in asphalt/Paver Block 80 1 98 100 0 0 1 0 0 Side Strips of Linking Road in Mastic Asphalt in 77 16 79 100 0 0 16 0 0 Western Suburbs Road in Asphalt in RIC & RIN wards in western 72 38 47 75 100 0 20 18 0 Suburbs Roads in Asphalt in P/South & P/North in W. S. 71 44 38 65 95 100 19 21 4 Improvement of Side Strips of S.V. Road in 64 39 39 65 95 100 16 19 3 Western Suburbs Mithi river from Airport new bridge-Marwa F.O.B. 32 28 13 45 80 100 10 11 6 Different Roads of North Zone And South Zone 24 0 99 100 0 0 0 0 0 Road and Retaining Wall of River Sabarmati 21 6 73 100 0 0 6 0 0 Development of Model Road Phase-2,In South 21 1 93 100 0 0 1 0 0 Zone Road at Ring Road 18 1 94 100 0 0 1 0 0 Roads Making at Isanpur, Vatva & Lambha Ward 9 6 34 65 95 100 3 3 0 – South Zone Roads – Dani Limbda, Baherampura & Ghodasar 8 3 61 95 100 0 3 0 0 Ward – South Zone Construction of NH-348 and Amra Marg of JNPT 328 318 3 25 55 95 72 98 131 Phase -III Gavanphata interchange and NH-4B in the state or 387 375 3 35 60 95 124 97 135 Maharashtra Karalphata interchange and connectivity to 350 340 3 25 55 95 77 105 140 proposed 4th terminal of JNPT Metro Projects DMRC CC-24 1028 317 69 95 100 0 266 51 0 DMRC CC-20 379 36 91 100 0 0 36 0 0 Elevated Viaduct of Metro Depot in Khokhra 278 140 50 85 100 0 98 42 0 Depot-cum-Workshop at Taloja for Navi Mumbai 132 45 66 85 100 0 25 20 0 Metro Line Depot approach viaduct for 68 4 94 100 0 0 4 0 0 Elevated viaduct and 6 elevated stations of 360 356 1 5 25 50 13 72 90 Andheri– Dahisar Corridor Underground Stations at CSIA Domestic, Sahar Road and CSIA International and Associated 2154 2154 0 3 25 50 65 474 538 Tunnels Underground Section & Stations at Dharavi, B.K.C. Vidya Nagari and Santa Cruz and 2858 2858 0 3 25 50 86 629 715 Associated Tunnels Total 11358 8646 2083 1611 2127 2052

Source: JKIL ,Ventura Research

Order book to be maintained at ~Rs. 9,000-10,000 crore

Going forward, we expect the management to focus on execution while keeping the order book at Rs 9,000-10,000 levels. We have assumed conservative project completion timelines and order inflows of ~Rs. 1,700 crores in FY18 and FY19 each.

New order inflows and closing order book

9000 8000 7000 6000 5000 4000

3000

2000 1000 0 FY14 FY15 FY16 FY17E FY18E FY19E

Total order book New order inflows

Source: JKIL ,Ventura Research

 Urbanization capex to drive order inflows

The Rs 100 bn crore 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. With plans to launch infra projects worth Rs 740 bn in 2016, the total infra spending in Mumbai is cumulatively expected to touch Rs 1000 bn in the coming few years. With such a robust pipeline and with execution experience of a large order, we believe J Kumar’s scale of construction activity could expand significantly in the coming years.

Slew of metro projects planned

Metro projects -current status Length Project cost Implementing Particulars (km) (INRbn) agency Current status Under-construction Metro Mumbai Metro II &III 195.0 651.0 JKIL,HCC,L&T EPC contractor shortlisted 38.2 87.0 NMRCL Under construction 35.0 118.0 LMRC Phase I COD expected in Dec 2016 37.9 117.0 MEGA Under construction 25.6 52.0 KMRL COD expected soon Total 403.0 1185.0 Planned Metro 31.5 136.0 36.0 105.0 26.0 75.0 30.0 65.0 25.0 65.0 Ludhiana Metro 28.8 87.0 37.6 136.0 Bhopal Metro 85.0 80.0 107.0 120.0 Total 406.9 869.0

Source: JKIL ,Ventura Research

 Debt to remain at comfortable levels despite the execution of a lumpy order book

Despite the execution of an order in excess of Rs 5,000 crore, a first timer for the company, the balance sheet is not expected to stretch significantly. D/E is expected to increase only marginally from 0.28x to 0.57x by FY19. This is primarily because:

i) 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. The company is expected to receive interest free advances worth Rs 700 crores by the end of FY17 towards the Metro order (including the L1 Metro orders).

ii) For the Metro order, it is expected to incur a capex of ~Rs 300 crores for the tunnel boring machine, which is less than 5% of the total project order. 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. It is hence, able to leverage on this bank for future projects resulting in minimal capex requirements.

Cash flow from operation to take a hit only in FY18

Rs. in crore 600.00 400.00

200.00

0.00 FY13 FY14 FY15 FY16 FY17E FY18E FY19E -200.00

-400.00 -600.00

-800.00 Cash from operating activity

Source: JKIL ,Ventura Research

 Litigation with BMC not to impact new order inflows

JKIL had won an order from BMC for concreting of various roads in western suburbs. From the total project cost of Rs. 421 crore, it had a share of 51% of which most of the projects were sub contracted to other parties. During the construction period, the vigilance department of Municipal Corporation of Greater Mumbai had carried out some enquiry on the road projects done in the name of J.Kumar KR construction works. (JV of JKIL). During investigation, it was observed that the crust thickness was less than required. These irregularities were around 6% to 7% of the work done. While various media reports suggested that JKIL would get black listed, the company itself clarified that they had received no such communication from the BMC. Moreover, the projects were still under execution and were well within the defect liability period. Further MMRDA made a disclosure that it would not reject any projects awarded to the companies that have been blacklisted by BMC. This insulates the company from any black listing.

 Q1FY17 performance: Revenues increase on the back of steady project completion, however margins dip

In Q1FY17, JKIL’s revenue grew 11% to Rs. 403 crores on the back of healthy order backlog that it has received. EBITDA margin fell by 100 bps YoY to 18% led by higher cost of services and raw materials. PAT margin expanded 30 bps YoY to 7%.

In FY 16, JKIL’s revenue grew 4% YoY to Rs. 1,366 crores. EBITDA margin fell by 85 bps to 18% led by higher cost of raw materials. PAT margin expanded 70 bps to 11%led by lower finance cost.

Financial Performance (Rs. In crore)

Description Q1FY17 Q1FY16 FY201603 FY201503 Net Sales 403.3 363.5 1408.6 1343.2 Growth (%) 10.9 4.9 Total expenditure 335.3 296.3 1160.3 1092.6 EBITDA 68.0 67.2 248.3 250.6 Margin (%) 16.9 18.5 17.6 18.7

Depreciation 13.1 12.5 51.2 47.4

EBIT (Ex. OI) 54.9 54.7 197.1 203.2 Non-Operating Income 6.1 2.9 17.7 13.1 EBIT 61.0 57.6 214.8 216.3 Margin (%) 15.1 15.8 15.2 16.1 Finance Cost 18.1 19.6 61.1 76.8 PBT 42.9 38.0 153.7 139.5

Margin (%) 10.6 10.5 10.9 10.4

Provision for Tax 13.5 12.5 50.6 45.1 Profit after Tax 29.4 25.5 103.1 94.4 Margin (%) 7.3 7.0 7.3 7.0 Net Profit 29.4 25.5 103.1 94.4

Source: JKIL ,Ventura Research

 Financial Outlook:

 Robust Revenue growth of ~30% CAGR JKIL has a robust order backlog of 6.1x FY16 sales. Further it has also got L1 orders worth Rs. 1,350 crore. We have assumed order inflow of ~Rs. 1,700 crore per annum for FY18 and FY19. Based on the above order, we expect revenues to grow at a CAGR of 29% to Rs. 3,052 crore by FY19 (from Rs.1,409 crore clocked in FY16).

 EBITDA margins to remain in the 16-17% We expect the EBITDA to grow at a 3-year CAGR of 27% to Rs. 507 crore in FY19.The EBITDA margin is expected to marginally contract to 16-17% given the higher share of metro revenues.

Margins to contract given the higher share of Robust revenue growth on the cards metro revenues

3500 60% 19% 10% 19% 9% 3000 50% 8% 18% 2500 40% 7% 18% 2000 6% 30% 17% 5% 1500 17% 4% 20% 1000 3% 16% 2% 500 10% 16% 1%

0 0% 15% 0% FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY14 FY15 FY16 FY17E FY18E FY19E

Revenue Growth EBITDA Margin PAT Margin (RHS)

Source: JKIL, Ventura Research Source: JKIL ,Ventura Research

D/E to remain benign Return ratio to set to improve

1.20 40% 19% 1.00 17% 35%

0.80 15% 30% 13% 0.60 11% 25% 0.40 9% 20% 0.20 7% 0.00 5% 15% 2013 2014 2015 2016 2017 2018 2019 FY14 FY15 FY16 FY17E FY18E FY19E DE Ratio ROE ROCE (RHS)

Source: JKIL, Ventura Research Source: JKIL ,Ventura Research

 Valuation: Target of Rs 326, an upside of 58% from the CMP of Rs 206

Prior to BMC litigation, the stock was trading at 1 year forward PE of 12x. Post that litigation came to the forefront, the stock crashed to a low PE of sub 5x. We believe that the correction is overdone and the stock would get re-rated to the erstwhile multiple of 12x FY19 given that,

 De-registration by the BMC unlikely to have any material impact since JKIL is qualified to bid for projects from all other authorities.  Rapid ramp-up in order book to lead to robust revenue growth without compromising on the balance sheet strength  Infra spending has gained traction; potential biddings of worth over Rs 1000 bn in pipeline in Mumbai alone.

Based on this, we expect a target price of Rs. 326 over a period of 24 months respectively, which is a potential upside of 58% from the CMP of Rs. 206.

The key risk to our target price is substantial delay in the execution of the Metro project and the resultant cost escalation. As of now, the progress is on track and we will closely monitor the progress of this order.

PE band chart 450 400 350

300

250

200

150 100 50

0

10 10 11 11 13 14 14 15 15 12 12 13 16 16

10 11 14 15 12 13 16

09 10 11 13 14 15 12 16

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Jul Jul Jul Jul Jul Jul Jul

Oct Oct Oct Oct Oct Oct Oct Oct

Jan Apr Jan Apr Jan Jan Apr Jan Apr Apr Apr Jan Apr Jan CMP 2X 4X 6X 8X 10X

Source: JKIL ,Ventura Research

Peer comparison

25% ITD Cementation 20%

Sadbhav 15% Engineering

10% NCC JKIL Simplex Infra

ROE (%) FY17E HCC 5%

0% 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 PEG Ratio FY17E

Source: JKIL ,Ventura Research

 Financial Outlook

Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E Y/E March, Fig in ` Cr FY16 FY17E FY18E FY19E Profit & Loss Statement Per Share Data (Rs) Net Sales 1408.6 1678.2 2617.1 3052.5 Adj. EPS 13.6 19.3 20.6 27.2 % Chg. 4.9 19.1 55.9 16.6 Cash EPS 20.4 26.5 31.0 38.1 Total Expenditure 1160.2 1382.8 2182.7 2545.8 DPS 2.0 2.5 2.5 2.5 % Chg. 6.2 19.2 57.8 16.6 Book Value 169.6 185.8 203.5 227.6 EBDITA 248.4 295.4 434.4 506.7 Capital, Liquidity, Returns Ratio EBDITA Margin % 17.6 17.6 16.6 16.6 Debt / Equity (x) 0.3 0.2 0.6 0.6 Other Income 17.7 21.0 32.8 38.3 Current Ratio (x) 1.7 1.7 2.5 2.6 PBDIT 266.0 316.4 467.2 545.0 ROE (%) 8% 10% 10% 12% Depreciation 51.2 55.1 78.6 82.5 ROCE (%) 19% 20% 19% 20% Interest 61.1 43.8 155.8 155.8 Dividend Yield (%) 1% 1% 1% 1% Exceptional items 0.0 0.0 0.0 0.0 Valuation Ratio (x) PBT 153.8 217.4 232.8 306.6 P/E 20.1 10.7 10.0 7.6 Provision for tax 50.6 71.8 76.8 101.2 P/BV 1.6 1.1 1.0 0.9 Reported PAT 103.2 145.7 156.0 205.5 EV/Sales 1.6 0.7 0.9 0.8 Minority Interest 0.0 0.0 0.0 0.0 EV/EBIDTA 9.1 4.1 5.3 4.6 PAT 103.2 145.7 156.0 205.5 Efficiency Ratio (x) PAT Margin (%) 7.3 8.7 6.0 6.7 Inventory (days) 126 130 135 132 RM % of Sales 62.9 62.5 62.5 62.5 Debtors (days) 77 80 85 82 Employee cost % of sale 5.6 6.0 6.0 6.0 Creditors (days) 30 30 30 32 Balance Sheet Cash Flow Statement Share Capital 37.8 37.8 37.8 37.8 Profit Before Tax 153.8 217.4 232.8 306.6 Reserves & Surplus 1245.5 1368.4 1501.6 1684.3 Depreciation 51.2 55.1 78.6 82.5 Minority Interest 0.0 0.0 0.0 0.0 Working Capital Changes -141.1 267.5 -1053.4 -239.1 Long Term Borrowings 28.9 28.9 728.9 728.9 Others 0.1 -49.0 46.2 16.4 Deferred Tax Liability 16.9 16.5 23.6 24.7 Operating Cash Flow 64.0 491.1 -695.8 166.4 Other Non Current Lia 0.8 0.9 0.9 0.9 Capital Expenditure -226.4 100.8 -219.2 -11.7 Total Liabilities 1330.0 1452.6 2292.9 2476.7 Other Investment Activities 0.0 0.0 0.0 0.0 Gross Block 655.0 705.0 1005.0 1055.0 Cash Flow from Investing -226.4 100.8 -219.2 -11.7 Less: Acc. Depreciation 225.1 280.2 358.8 441.3 Changes in Share Capital 409.3 0.0 0.0 0.0 Net Block 429.9 424.8 646.2 613.7 Changes in Borrowings -161.4 -80.0 700.0 0.0 Capital WIP 67.5 67.5 67.5 67.5 Dividend and Interest -76.6 -66.6 -178.6 -178.6 Other Non Current Assets 179.7 50.0 2.0 2.0 Cash Flow from Financing 171.3 -146.6 521.4 -178.6 Net Current Assets 468.4 691.9 1235.4 1397.0 Net Change in Cash 8.8 445.3 -393.6 -24.0 Long term Advances 184.4 218.2 341.7 396.8 Opening Cash Balance 19.7 28.5 473.8 80.3 Total Assets 1330.0 1452.3 2292.8 2477.0 Closing Cash Balance 28.5 473.8 80.3 56.3

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