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Edelweiss Securities Limited

J Kumar Infraprojects (JKIL) is an emerging infrastructure player,

primarily involved in the urban infrastructure segment in the capacity of

an EPC contractor. We estimate the company to post 25% earnings CAGR

over FY12-15 riding robust order book (book-to-bill at 4.8x at Q3FY13

end), low leverage (D/E at 0.4x) and geographical & segmental

diversification. We value the contracting business at one year forward

P/E of 6.5x, arriving at a target price of INR310 (implying 41% upside

from CMP). We initiate coverage with ‘BUY’.

Robust revenue, diversification to catapult into big league

JKIL, primarily present in the transportation (roads, metro, bridges and flyovers) space,

has embarked on a high growth trajectory, posting a revenue and PAT CAGR of 53%

each over FY07-12. The company boasted of an INR47bn order book at Q3FY13 end

(including INR8bn L1 orders). Robust revenue visibility and diversification into new

segments and geographies will be the springboard of stable growth in the future.

Focus on profitable growth with healthy return ratios

The company’s operating margins, leverage and working capital are amongst the best

in the industry, so are its return ratios (RoE upwards of 16%). The reason behind the

company’s high margins is its strategy of not sub-contracting work to smaller

contractors. Management has stressed that operating margin will not be sacrificed at

the altar of revenue growth. Also, JKIL is steering clear of BOT projects as it aims to

keep its balance sheet light. Ergo, its RoE is expected to inch closer to 20% in future.

Outlook and valuations: Attractive; initiate with ‘BUY’

Robust order book and resilient execution will propel JKIL’s earnings CAGR to 25% over

FY12-15E. We arrive at a target price of INR310/share, assigning a 6.5x P/E to FY15E

earnings. We believe, scaling up of operations will equip JKIL with a better risk-reward

profile going ahead. We initiate coverage with ‘BUY’ recommendation.

INITIATING COVERAGE

J KUMAR INFRAPROJECTS Building the growth DNA

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Growth

MARKET DATA (R: JKIP.BO, B: JKIL IN)

CMP : INR 220

Target Price : INR 310

52-week range (INR) : 248 / 143

Share in issue (mn) : 27.8

M cap (INR bn/USD mn) : 6 / 112

Avg. Daily Vol. BSE/NSE (‘000) : 50.0

SHARE HOLDING PATTERN (%)

Current Q2FY13 Q1FY13

Promoters *

55.4 55.4 54.5

MF's, FI's & BKs 0.0 0.0 0.0

FII's 7.5 2.8 4.9

others 37.1 41.8 40.6

* Promoters pledged shares

(% of share in issue)

: 14.4

PRICE PERFORMANCE (%)

BSE Midcap

Index Stock

Stock over

Index

1 month (7.7) (6.2) 1.4

3 months 0.5 (5.1) (5.6)

12 months 0.0 22.9 22.8

Parvez Akhtar Qazi

+91 22 4063 5405

[email protected]

Click on image to view video

Ind

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India Equity Research| Construction

February 21, 2013

Financials

Year to March FY11 FY12 FY13E FY14E

Revenue (INR mn) 9,492 9,316 10,296 14,039

Rev. growth (%) 24.2 (1.9) 10.5 36.4

EBITDA (INR mn) 1,435 1,500 1,647 2,274

Net profit (INR mn) 739 681 705 998

Shares outstanding (mn) 28 28 28 28

Basic EPS (INR) 26.6 24.5 25.3 35.9

EPS growth (%) 5.6 (7.9) 3.5 41.6

P/E (x) 8.3 9.0 8.7 6.1

EV/ EBITDA (x) 5.1 4.5 5.3 3.9

ROAE (%) 21.4 16.7 15.0 18.2

ROACE (%) 27.7 22.5 19.1 21.0

http://www.edelresearch.com//webcast/webcast_new.aspx?Id=22537&Type=ynaj9XvqmJoptbYzJzovtA==

Construction

2 Edelweiss Securities Limited

Investment Rationale

Strong growth prospects backed by robust execution skills

JKIL is an emerging player in the infrastructure space. The company primarily works as an

EPC contractor in the urban infrastructure segment and is present in the transportation

(roads, metro, bridges and flyovers), buildings, irrigation and piling segments.

The company’s promoters have been in the contracting business since 1980 (starting as

maintenance contractor of PWD buildings). JKIL was originally incorporated as J. Kumar &

Company (India) in December 1999. It started its operations in 2004 subsequent to the

transfer of the Class 1A registration of J. Kumar & Company to JKIL.

JKIL has been mostly active in infrastructure projects in the Mumbai, Pune, Aurangabad and

Vidharbha regions of Maharashtra, besides undertaking piling contracts for projects across

India. Over the past couple of years, the company has won projects in other regions like

Delhi, Gujarat, Rajasthan as well. It enjoys various accreditations such as the QA certification

of ISO 9001:2000 certification for quality management system.

JKIL has been on a high growth trajectory, posting revenue and PAT CAGR of 53% from FY07-

12. Strong revenue visibility as well as diversification into new segments and geographies

will provide stable growth going ahead.

Rapid order book growth improves revenue visibility

With a modest beginning in FY05, JKIL has scaled up substantially over the years. Its order

book has ballooned from INR30.0mn at FY05 end to INR47bn (including INR8bn L1 orders) at

Q3FY13 end. The 4.8x order book/revenue ratio at Q3FY13 end provides strong revenue

visibility over the medium term.

Chart 1: Revenue visibility improving Chart 2: Transport dominates order book

Source: Company, Edelweiss research

Transportation engineering projects contribute the lion’s share of the current order book;

irrigation and civil construction projects contribute majority of the balance.

1.0

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14

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35

46

56

FY

08

FY

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FY

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FY

11

FY

12

Q3

FY

13

(x)

(IN

R b

n)

Order book (L.H.S.)

Order book / TTM revenues (R.H.S.)

JKIL has long standing experience

in transportation projects like

roads, bridges, flyovers etc.

Transport

84.7%

Irrigation

2.0%

Civil

constructio

n

12.6%

Piling

0.7%

J Kumar Infraprojects


Chart 3: Transportation has provided majority of order book historically


Chart 4: Transportation segment provides bulk of revenues


Corresponding to the order book, transportation engineering projects also contribute bulk

to the revenue. Though share of piling in the order book is minuscule, its contribution to

revenue is higher on account of piling projects being of smaller duration.

JVs to augment pre-qualification as well as execution capabilities

The company has partnered with reputed companies like China Railway No.3 Engineering

Group (CRTG) and Nagarjuna Construction (NCC) for JVs. This strategy is likely to enhance its

pre-qualification capabilities and enable it to execute bigger and more complex projects in

the future.

0.0

20.0

40.0

60.0

80.0

100.0

FY08 FY09 FY10 FY11 FY12

(%)

Transport Irrigation Civil construction Piling

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80.0

100.0

FY08 FY09 FY10 FY11 FY12

(%)

Transport Irrigation Civil construction Piling

Transportation has provided bulk

of order book and revenues over

the years

Construction


Table 1: Some projects with JV companies


Focus on profitable growth with healthy return ratios

JKIL’s debt/equity at 0.4x at Q2FY13 end is amongst the lowest in the construction industry;

same is the case with its return ratio—RoE of ~17% in FY12 is amongst the best among

contracting peers. This is a result of the following factors:

• Management has maintained that revenue growth will not be at the expense of

operating margin. The company does not sub-contract work on its projects to smaller

contractors, so as to save on margin. Thus, JKIL has been able to maintain high margin

even when order book growth has been sluggish.

Table 2: JKIL’s operating margins are higher than its peers


• JKIL has steered clear of BOT projects; this arises from the management’s desire to

keep its balance sheet light. Also, the company believes that intense competition along

with back-ended nature of returns for BOT projects negate the advantage of revenue

visibility that BOT projects bring in.

JV partner Project Project size

(INR mn)

CRTG Design and construction of tunnel (by shield

TBM), underground station at Naraina Vihar

& underground works corridor of Delhi Metro

Phase-III

13,850

Nagarjuna

Construction

Construction of flyover at Kapurbawadi

junction on Thane Ghodbunder Road

1,314

Nagarjuna

Construction

Construction of 4 flyovers in Mumbai 1,119

RPS Infraprojects Construction of ROB at Jogeshwari, Mumbai 1,982

PBA Construction of Phase -II-BRTS corridors for

Ahmedabad

1,160

FY09 FY10 FY11 FY12

JKIL 14.9 16.8 15.1 16.1

NCC 9.0 10.1 9.6 7.6

IVRCL 8.5 9.7 9.1 8.1

Simplex 8.6 9.9 10.2 9.1

Company

EBITDA margins (%)

Margins not to be sacrificed in

pursuit of revenue growth



Table 3: JKIL has healthy leverage levels


• JKIL has efficiently managed its working capital cycle, which at 115 days (ex-cash) at

FY12 end was amongst the better ones in the industry. The company is confident of

maintaining its working capital cycle at similar level.

Table 4: JKIL’s working capital cycle is better than its peers


Table 5: JKIL boasts of best-in-class RoEs


As a result of these factors, the company has managed to maintain its return ratios at a

healthy level in spite of being in growth stage. Going ahead, it expects PAT growth to

outstrip revenue growth and RoEs to inch closer to 20%.

Derisking business model to ensure sustainable growth

In the initial growth years, the company focused on the urban infrastructure segment;

majority of the company’s orders came from the state of Maharashtra, specifically the

Mumbai Metropolitan and Pune regions. Maharashtra State Road Development Corp.

(MSRDC), Mumbai Metropolitan Region Development Authority (MMRDA), Municipal

Corporation of Greater Mumbai (MCGM) etc., used to provide the lion’s share of projects in

order book.

With growth in operations, JKIL has taken steps to ensure that the business model gets

diversified to de-risk future growth. This led to the company spreading its wings in other

regions like Rajasthan, Gujarat, Delhi etc. As a result, now nearly 50% of its order book is

from outside Maharashtra.

FY09 FY10 FY11 FY12

JKIL 0.3 0.2 0.4 0.4

NCC 0.7 0.7 1.0 0.9

IVRCL 0.8 0.9 1.1 1.2

Simplex 1.3 1.3 1.5 1.8

Debt/equity (x)

Company

FY09 FY10 FY11 FY12

JKIL 64 88 126 115

NCC 139 158 205 181

IVRCL 160 140 169 176

Simplex 81 100 131 158

Company

NWC Days (ex-cash)

FY10 FY11 FY12 FY09 FY10 FY11 FY12

JKIL 30.3 21.4 16.7 27.3 39.8 27.7 22.5

NCC 9.3 7.1 1.5 11.8 12.8 9.6 6.6

IVRCL 11.5 8.2 0.8 12.7 14.2 11.6 8.5

Simplex 13.7 12.0 8.4 14.6 13.0 12.2 11.2

Company

RoAE (%) RoACE (%)

Best-in-class return ratios and

balance sheet

Construction


Chart 5: Geographical diversification of order book


Similarly, going beyond its traditional strength in the roads and bridges segment, the

company ventured into other verticals like piling, buildings, marine transportation and

irrigation. It has recently entered the promising metro rail segment by winning ~INR14bn

worth orders from Delhi Metro for design and construction of tunnels. Also, it has tried to

broad base its client base by winning orders from the private sector as well to counter any

slowdown in spending from the government.

Chart 6: Share of government projects in order book has dipped


Again, to benefit from economies of scale, JKIL has tried to graduate to bigger order sizes. It

won an INR6bn order from Essel Group for widening the Sion-Panvel highway. Similarly, it

won an INR5.2bn order for construction of a building from Uttar Pradesh Rajkiya Nirman

Nigam. It is also L1 in a marine transportation project awarded by MSRDC.

We believe management’s efforts to enter new segments, geographies and to take on more

challenging jobs will minimise concentration risk and support a secular earnings trajectory.

0.0

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FY09 FY10 FY11 FY12 Q3FY13

(%)

Maharashtra Gujarat Rajasthan Delhi

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80.0

100.0

FY09 FY10 FY11 FY12 Q3FY13

(%)

Government projects Private sector projects

Widening client base and

expanding geographically



Strong equipment bank aids timely execution

JKIL owns a large fleet of sophisticated equipment required for project execution. These

include excavators and loaders, hydraulic piling rigs, rollers, transit mixers, excavators,

concrete batching plants etc. This has enabled the company complete projects on time

without resorting to leasing of equipments, and thus save on lease rentals. JKIL believes that

in the long term, leased equipments are cost ineffective, and therefore, ownership and use

of modern construction equipment results in cost savings.

The company also has its own RMC units in Delhi, Pune, Alwar, Mumbai, among others;

majority of the output is used for captive consumption, and the surplus, if any, is sold in the

open market.

Construction


Valuation

Order book, execution to propel earnings

JKIL’s earnings have followed the high growth trajectory of its revenue. Its net profit posted

a CAGR of 53% between FY07 and FY12. We expect the company’s revenue growth to pick

up from FY14E following the strong order inflows in FY13. As a result of the increasing base,

we expect the company’s earnings to post 25% CAGR over FY12-15E backed by strong order

book and robust execution strength. We believe JKIL will be able to manage its working

capital cycle efficiently, keeping debt levels in check. As a result, its RoEs are likely to inch

closer to the 20% mark in future.

Re-rating will follow profitable execution

With JKIL on a fast track to growth, the company’s operations are likely to expand

significantly going ahead. We believe the company will be able to perform strongly on the

execution front in the future while continuing to operate at high profitability. The associated

risk with a relatively small scale of operations in the contracting business should also

minimise with the company’s operations expanding, enabling JKIL to achieve a better risk-

reward profile going ahead.

We have valued JKIL at INR310/share, assigning a 6.5x P/E to FY15E earnings. We initiate

coverage on the stock with a ‘BUY’ recommendation.

Table 6: Peer comparison


Note: *for implied construction business

FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY14E FY15E

JKIL 16.0 16.2 15.8 117 113 110 8.7 6.1 4.6 18.2 20.2

NCC * 8.0 8.6 8.8 194 176 170 9.9 5.4 3.8 4.9 6.7

IVRCL 6.1 7.0 8.5 211 162 134 NA NA 18.9 NA 2.3

Simplex 9.1 9.4 9.7 171 155 153 14.1 13.2 8.3 5.0 7.5

(0.5) 37.8

5.0 1.8

Company Rev. CAGR (%)

(FY12-15E)

EBITDA margins (%) EPS CAGR (%)

(FY12-15E)

NWC Days P/E (x)

13.3 69.4

24.3 24.6

RoAE (%)

Target price of INR310; based on

1-yr forward P/E of 6.5x



Key Risks

Segment concentration risk

Majority of JKIL’s orders are from the transportation segment. This exposes it to

concentration risk arising from exposure to a particular segment.

Execution risk

While JKIL has done well over the past couple of years, it has yet to demonstrate its

execution capabilities in new segments and geographies that the company is entering. Also,

the average size of projects is increasing and they also involve higher level of complexity

than what the company has encountered so far. Completion of such projects within the

stipulated time and cost will be paramount to maintain profitability.

Profitability risks

Historically, JKIL’s operating profitability has been higher than its peers. This can be

explained partly by the geographical and segmental concentration of the order book, which

leads to better control over costs. With the expansion in size of operations, particularly to

new geographies and segments, JKIL may face challenges in maintaining similar levels of

profitability.

Also, with increasing size of projects, JKIL will face competition from bigger, more

experienced and established players. Such heightened competition can lead to margin

dilution.

Construction


Company Description

JKIL is a civil engineering and infrastructure development company with primary focus on

development of roads, flyovers, bridges, metro projects, bridges, irrigation projects,

commercial and residential buildings, railway buildings, sports complexes, etc. It also

undertakes the piling of foundation work using hydraulic piling rigs for major projects which

are awarded to other contractors.

With over two decades of experience, it has established a track record of efficient project

management and execution skills with trained and skilled manpower, efficient deployment

of equipment and strategic purchasing capabilities.

JKIL went public in January 2008, with a public issue of 6.5mn shares at a price of INR110/

per share aggregating INR715mn. The issue proceeds were utilised for meeting the

company’s capex and working capital requirements. It also raised INR555mn via a QIP in

December 2009, issuing 3.1mn shares at INR180.25/share.

Table 7: Board of directors


Name Position Remarks

Mr. Jagdish Kumar Gupta Chairman and

Managing Director

He is the founder of the company and was instrumental in growing the

company. He has 3 decades of experience in executing infrastructure projects.

In 1980, he set up a proprietorship concern by the name of J. Kumar & Co.

which ultimately became JKIL.

Mr. Kamal J Gupta Executive Director He has done his B.E. in Civil Engg. He has been associated with JKIL since 1996

and has played a vital role in execution of flyovers within the stipulated time

frame.

Mr. Nalin J Gupta Executive Director He is a commerce graduate and a member of the Indian Institution of Bridge

Engineers. He has been associated with JKIL since 1997 and is instrumental in

construction work related to roads, subways, etc. He has played a vital role in

developing the pil ing business of the company.

Dr. R. Srinivasan Independent

Director

He has a doctorate in banking and finance and has extensive managerial

expertise. He has served as the Chairman and Managing Director of Bank of

India and Allahabad Bank.

Mr. Padmanabh P. Vora Independent

Director

He is presently a consultant with Deloitte Touche Tomatsu India. He is a

Chartered Accountant by profession and has over 36 years experience in the

fi leds of finance, banking and management. He has also served as Chairman

and Managing Director of IDBI Bank. He is also associated currently with as

Chairman/Director of several companies focussing in real estate,

manufacturing, and finance etc.

Mr. Ashwani Kumar Independent

Director

He has over 4 decades of experience in the Income Tax Department. He joined

the Indian Revenue Service in November 1973 and retired as Chief

Commissioner of Income Tax from Chennai in 2008. He is a Post Graduate in

Political Science from Allahabad University.



The company is present in the following segments:

• Transportation: This is the dominant segment in the company’s order book which has

historically provided more than 80% of the work. It comprises roads, bridges, flyovers,

subways, overbridges, skywalks, railway terminus/stations etc. The company designs

and constructs these projects as per client’s specifications on turnkey basis.

Recently, it has entered the promising metro rail segment by winning ~INR14bn orders

for design and construction of tunnels and underground metro stations for the Delhi

Metro. It has also won an INR1.5bn order for Navi Mumbai Metro project and is L1 in a

marine transportation project awarded by MSRDC.

• Buildings: JKIL’s offerings in this segment include both commercial and residential

buildings. While the former includes office/commercial buildings, sports complexes,

swimming pools etc., residential buildings include housing societies etc.

• Irrigation: In this segment, the company builds dams, canals, aqueducts & irrigation

tanks, spillways etc.

• Piling: JKIL entered this segment in FY06 by acquiring hydraulic piling rigs. Currently, it

has 22 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.

Table 8: Major clients in each segment


Segment Client

Transportation Delhi Metro Rail Corp. (DMRC), Maharashtra State Road

Development Corp. (MSRDC), Essel Group, Mumbai Metropolitan

Region Development Authority (MMRDA), Municipal Corporation of

Greater Mumbai (MCGM), Pune Municipal Corporation (PCMC),

Mumbai Rail Vikas Corporation (MRVC), Central Railways

Irrigation Vidarbha Irrigation Development Corporation (VIDC), Maharashtra

Krishna Valley Development Corporation (MKVDC)

Buildings Airport Authority of India (AAI), Financial Technologies, Reddy

Builders & Developers, Thane Municipal Corporation, Multi

Commodity Exchange, Goregaon Sports Club, Western Railway etc.

Piling Nagarjuna Construction, L&T, Era Construction, India Bulls, HDIL,

Sheth Developers, Lodha Developers

Construction


Table 9: Major projects currently under execution


Segment Project Project Size (INR Mn) Client

Transportation Design and construction of tunnels (by shield TBM),

stations and ramp between Lajpat Nagar and Hazrat

Nizamuddin stations for Delhi Metro Phase III

10,109 DMRC

Transportation Widening & improvement of Sion – Panvel highway 6,000 Essel Group

Transportation Design and construction of tunnels (by shield TBM),

underground stations at Naraina Vihar and ramps at

Mayapuri and Delhi Cantt for Delhi Metro Phase III

3,759 DMRC

Transportation Construction of Eastern Freeway section from Panjarapol

to Chembur Mankurd Link Road

2,400 MMRDA

Transportation Construction of ROB at Jogeshwari 1,982 MCGM

Transportation Construction of Flyover at Kapurwadi junction on Thane

Ghodbunder Raod

1,600 Thane Municipal

Corp

Transportation Design and construction of viaduct and two elevated

stations, Rohini Sector -18 & Badli for Delhi Metro

1,530 DMRC

Transportation Design & construction of 4.91 km elevated viaduct for

Navi Mumbai Metro Project

1,460 CIDCO

Transportation Construction of Phase -II-BRTS corridors for Ahmedabad 1,160 Ahmedabad

Municipal Corp

Transportation Widening and improvement of Ambadi- Washind (SH-40

and MDR-45) for 21.25 Km length with bridge for 2+2

lanes

1,107 MMRDA

Transportation Implementation of Mumbai Monorail project 900 L & T

Buildings Construction of ESIC Medical College, Alwar, Rajasthan 5,200 Uttar Pradesh Rajkiya

Nirman Nigam

Buildings Modernisation of integrated border check posts at 22

locations in the state of Maharashtra

333 Sadbhav Eng

Irrigation Lower Wardha mail canal - construction of barrage @

Pulgaon on Wardha river

926 Pipri

Irrigation Construction of earthwork of dam, excavation of approach

and tail channel

77 VIDC



Table 10: Major projects completed


Segment Project Project Size (INR Mn) Client

Transportation Design and construction of 16 skywalks in Mumbai 5,594 MMRDA and MSRDC

Transportation Design and construction of 4 flyovers at Dr. Babasaheb

Ambedkar Marg , Mumbai

1,900 MMRDA

Transportation Widening and construction of Western Expess Highway

from Kulupwadi to Asha Nagar

683 MMRDA

Transportation Widening and construction of Western Express highway

from Times of India to South end of S.N. Dubey junction

627 MMRDA

Transportation Training of Mithi river (widening & deepening, RCC

retaining wall, service road)

606 MCGM

Transportation Construction of ROB across Western Railway tracks 537 MMRDA

Irrigation Construction of earth works and structures in Chilwari

branch canal

74 MKVDC

Irrigation Construction of earth works 60 MID, Pusad,

Maharashtra

Buildings Civil works, water supply, drainage, electrical and all ied

works

135 MCX

Buildings Construction of swimming pool complex 94 Thane Municipal

Corp.

Pil ing Rotary pil ing work 45 Richa Realtors

Pil ing Pil ing work 31 L & T

Construction


Financial Outlook

Order inflows to remain strong; revenue to grow steadily

Backed by the government’s thrust on improving infrastructure, we expect the buoyancy on

the order intake front to continue for JKIL going forward. With the realty segment too

showing signs of revival, orders from the building construction segment too are likely to pick

up.

We expect JKIL’s revenue to post 24% CAGR between FY12 and FY15E. Even though the

company has displayed impressive execution capability till date, it will have to contend with

the higher base effect going ahead.

Chart 7: Robust order intake to drive revenue growth


Operating profitability to remain stable

With the expansion in business operations, we expect JKIL to benefit from operating de-

leverage. We believe this will compensate for the necessary expenditures on meeting the

capex and working capital demands of the rapidly growing business. As a result, we believe

JKIL’s EBITDA and PAT margins are likely to be stable going forward.

0

20

40

60

80

100

FY11 FY12 FY13E FY14E FY15E

(IN

R b

n)

Order intake Revenues Order backlog

Steady order book and revenue

growth in medium term



Chart 8: EBITDA margins to remain stable Chart 9: PAT margins to improve slightly


Debt to remain in control despite rising growth needs

JKIL’s debt-equity stood at 0.4x at end Q2FY13. We expect it to remain within control over

the next couple of years. In spite of the rapidly growing size of operations, the company has

kept a tight leash on debt. This is a result of its higher margins as well as efficient working

capital management.

Chart 10: Net worth and D/E ratio - Steady leverage levels


We believe, while JKIL will have to increasingly spend more on meeting growth

requirements of its business, it should be able to keep its leverage levels in check.

Superior return ratios due to high profitability and efficient operations

Despite being in the growth stage, the company has managed to post excellent return ratios

in its short history. RoE of ~17% and RoCE of ~23% in FY12 are the best amongst its

contracting peers. The primary reason for the excellent return ratios is the higher

profitability as well as efficient working capital cycle management.

12.0

13.8

15.6

17.4

19.2

21.0

1,028

1,506

1,983

2,461

2,938

3,416

FY

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FY

13

E

FY

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E

FY

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E

(%)

(IN

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n)

EBITDA EBITDA margins

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0.8

1.0

0

1,600

3,200

4,800

6,400

8,000

FY10 FY11 FY12 FY13E FY14E FY15E(x

)

(IN

R m

n)

Net worth D/E ratio (RHS)

5.0

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8.6

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544

753

963

1,172

1,382

1,591

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13

E

FY

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E

FY

15

E

(%)

(IN

R m

n)

PAT PAT margins

Tight leash on leverage

Construction


We believe, going ahead, improvement in revenue visibility is likely to lead to better asset

churns. This will help the company improve its return ratios.

Chart 11: Return ratios to improve



Funding requirements in tune with increase in size of operations

Since the company is in growth phase, its fund requirements are majorly from the capex

side as well as to meet the increased working capital requirements. Over the years, JKIL has

made judicious use of debt as well as equity to meet its funding requirements. We believe

going ahead, its internal accruals will be sufficient to meet majority of the funding

requirements. Any shortfall will be met by further debt infusion in the company.

Table 11: Funding summary (INR mn)


0.0

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FY11 FY12 FY13E FY14E FY15E

(%)

(%)

ROAE ROACE (R.H.S.)

FY10 FY11 FY12 FY13E FY14E FY15E

Use of funds

Capex 156 857 516 2,500 500 500

Investments (9) 1 0 0 0 0

Working capital 1,141 1,435 (352) 376 1,052 1,069

Total 1,288 2,293 164 2,876 1,552 1,569

Funded through

Equity 795 0 0 0 0 0

Debt 86 1,103 32 1,800 300 50

Internal accruals 958 819 803 873 1,268 1,658

Use of cash (550) 324 (670) 204 (16) (139)

Misc. expenses (1) 48 0 0 0 0

Total 1,288 2,293 164 2,876 1,552 1,569

Internal accruals and debt to fund

growth



Annexure

Urban infrastructure metrics in India

India, like most other developing countries, is witnessing a wave of urbanisation. The

percentage of population living in cities rose by 3.35% between 2001 and 2011; this rate of

growth was just 2.1% in 1991-2001, suggesting an increase in the rate of migration to urban

areas.

As per Census 2011, ~31% of India’s population, translating to 377mn, lives in urban areas.

It is projected that with the increase in the rate of urbanisation, ~600mn Indians will reside

in urban areas by 2031. This will be a sharp increase of 200mn in just 20 years and is likely to

add to the already existing pressure on urban infrastructure systems like transport, water

supply, sewerage and drainage, solid waste management etc.

On most parameters of urban development, India lags other developing countries. Only 27%

of urban transport in India is accounted for by public transport. Worse, the share of the

public transport fleet is on a declining trend; it dropped from 11% in 1951 to a meager 1.1%

in 2001. In 2009, only 20 out of 85 Indian cities with a population of 0.5 mn had bus services.

Government estimates suggest that individual water connections are available with 70.6%

of urban population in India (91% in China, 86% in South Africa and 80% in Brazil). The

duration of water supply in Indian cities is also less at 1-6 hours, compared with round the

clock supply in Brazil and China and 22 hours in Vietnam.

Also, 70% of water leakages occur from consumer connections and due to malfunctioning of

water meters. Non-revenue water (NRW) accounts for 50% of water production compared

with 5% in Singapore.

When it comes to sanitation, even a partial sewerage network is absent in close to 5,000

cities and towns in India. As per Census 2011, 37% of urban households are connected with

open drainage while 18% have no connection at all. As per a 2009 report of the Central

Pollution Control Board (CPCB), only ~20% of the sewage generated was treated before

disposal in Class I cities and Class II towns (as per 2001 census).

This rapid shift to cities is creating a large slum population in all major cities in India. The

Technical Group on the estimation of housing shortage projected a shortage of 18.8mn

dwelling units in urban areas in 2012. The projected slum population in India was ~95mn in

2012. Against this, the number of dwelling units sanctioned under JNNURM form 2005-12

was a paltry 1.6mn.

The above parameters paint a scary picture of the urban infrastructure in India. It clearly

suggests that investments in the urban infrastructure sector are woefully inadequate to

meet these requirements.

Construction


Eleventh Plan targets and achievement for urban infrastructure

It was estimated that ~INR1,300bn was required for implementation of the Eleventh plan

targets for urban water supply, sewerage and sanitation, drainage and solid waste

management.

Table 1: Estimated fund requirement for urban infrastructure over 2007-12

Source: Govt documents, Edelweiss research

Also, the Working group Report on Urban Transport for Eleventh Five Year Plan had

estimated that INR1,325bn was required for improving the urban transport system.

In order to meet these targets, the Government of India took various steps. The flagship

programme for this is the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). It

covers 63 cities with population above 1mn as per 2001 census, including 35 metro cities,

state capitals and culturally important towns.

The programme, which ran from 2005-12 had a budget of INR1,200bn. The Central

government had committed INR500bn as additional Central Assistance (ACA) under

JNNURM for its two sub-missions and two omnibus schemes. Recent reports suggest that

~INR800bn has been spent on JNNURM since 2005. The eventual central allocation reached

INR660bn by March 2012 leading to overall committed investment of INR1,237bn under the

scheme.

The government is also planning to launch second version of JNNURM i.e., JNNURM 2 with a

size of INR2,200bn to be spent over the next five years.

Notwithstanding the government’s efforts, the investment in this sector is falling short of

requirements. For e.g., the Eleventh Plan had anticipated an investment of INR1,437bn over

2007-12 in the water supply and sanitation segment. Against this, the actual investment is

likely to be just two-thirds of this. Keeping in mind this shortfall, the government has set an

aggressive target for the Twelfth Five Year Plan with INR2,435bn projected to be spent on

this area.

Sl No Sub-Sector Estimated % share of

amount (INR bn) expenditure

1 Urban water supply 537 41.5

2 Urban sewerage and sewerage treatment 532 41.1

3 Urban drainage 202 15.6

4 Solid waste management 22 1.7

5 MIS 0 0.0

6 R&D and PHE training 0 0.0

Total 1,292 100



The way ahead

The Ministry of Urban Development had set up a High Powered Expert Committee (HPEC)

under the chairpersonship of Dr. Isher Judge Ahluwalia. The committee has suggested that

~INR40,000bn as capital expenditure and another INR20,000bn for operation &

maintenance (O&M) expenditure (as per 2009-10 prices) are estimated to be required for

urban infrastructure over the next 20 years.

Of this, INR17,300bn will be required for urban roads, INR8,000bn for sectors delivering

urban services such as water supply, sewerage, solid waste management and storm water

drains and INR4,000bn for renewal and redevelopment including slums.

The committee had also recommended that the scale of JNNURM should be expanded from

the current 0.1% of GDP to 0.25% of GDP every year.

Table 2: Estimates of urban transport investments by HPEC


Table 3: Estimates of water supply/sanitation investments by HPEC


For the Twelfth Plan period, the working group constituted by the Planning Commission on

financing urbanisation has worked INR2,884bn as the requirement of investment for the

urban transport sectors.

Table 4: Estimates of capex required for urban transport sector in XII Plan


The group has also estimated that INR992bn is the capex required for water

supply/sanitation sectors for the Twelfth Plan period.

Sector Investment from all sources % share in investment

over 20 year period (INR bn) in urban sector

Urban roads 17,289 55.8

Urban transport 4,494 14.5

Traffic support infrastructure 980 3.2

Street l ighting 186 0.6

Total 22,949 74.1

Sector Requirement of investment from all % share in investment

sources over 20 year period (INR bn) in urban sector

Water supply 3,209 10.4

Sewerage 2,427 7.8

Solid waste management 486 1.6

Storm water drains 1,910 6.2

2012 2013 2014 2015 2016 Total

Urban roads 298 352 416 490 579 2,135

Mass transit 78 92 108 127 150 555

Traffic managements systems 17 20 24 28 33 121

Street l ighting 3 4 4 5 6 23

Capacity building (urban transport) 10 10 10 10 10 50

Total 406 477 562 661 778 2,884

Requirement of capex across different sectors in urban areaAnnual Capex (INR bn)

Construction


Table 5: Estimates of capex required for water supply/sanitation sector in XII Plan


As per the draft of the XII Plan document, an indicative outlay of INR1,206bn has been made

for the Ministry of Urban Development (MoUD) and INR435bn for the Ministry of Housing

and Urban Poverty Alleviation (MoHUPA). This includes provision of INR1,020bn for the

flagship scheme of JNNURM which is a state sector ACA scheme and is implemented jointly

by both the aforesaid ministries.

2012 2013 2014 2015 2016 Total

Water supply 55 65 77 91 107 396

Sewerage 42 49 58 69 81 300

Solid waste 8 10 12 14 16 60

Storm water drains 33 39 46 54 64 236

Total 139 164 193 228 269 992

Annual capex (INR bn)Requirement of capex across different sectors in urban area



Financial Statements

Key assumption

Year FY12 FY13E FY14E FY15E

Macro

GDP(YoY %) 6.5 5.5 6.5 7.0

Inflation (Avg) 8.8 7.8 6.0 6.0

Repo rate (exit rate) 8.5 7.5 6.8 6.0

INR/USD 47.9 54.5 54.0 52.0

Company

Order intake (INR bn) 22 31 31 36

YoY growth (%) 205 42 0 16

Book-to-bill ratio (x) 2.8 4.4 4.4 4.4

Order backlog (INR bn) 25 45 62 79

Order backlog growth (%) 99 81 36 28

Revenue growth (%) (1) 14 36 28

Raw material costs (as % of sales) 63 63 63 63

Job work costs (as % of sales) 14 14 14 14

Salary costs (as % of sales) 3 3 3 3

Other admin costs (as % of sales) 5 5 5 5

Deprec. rate (as % of fixed assets) 10.0 7.1 7.0 7.5

Interest rate (%) 21.7 16.7 14.7 14.7

Tax rate (%) 32.7 32.2 32.2 32.2

Dividend per share 2.3 2.3 2.3 2.3

Capex (INR mn) 516 2,500 500 500

Increase in investments (INR mn) 0 0 0 0

Debtor days 35 34 33 31

Inventory days 108 110 108 107

Loans and advances (as % of rev.) 5.7 5.7 5.7 5.7

Sundry creditors days 89.1 87.1 89.1 90.1

Provision days 6 6 5 4

Incremental debt (INR mn) 32 1,800 300 50

Income statement (INR mn)

Year to March FY12 FY13E FY14E FY15E

Income from operations 9,316 10,296 14,039 18,015

Direct costs 7,113 7,872 10,706 13,774

Employee costs 279 308 420 558

Other expenses 424 468 639 837

Total operating expenses 7,816 8,649 11,765 15,169

EBITDA 1,500 1,647 2,274 2,846

Depreciation and amortisation 189 241 343 405

EBIT 1,311 1,406 1,931 2,441

Interest expense 366 434 536 562

Other income 67 67 77 76

Profit before tax 1,012 1,039 1,472 1,955

Provision for tax 331 335 474 630

Core profit 681 705 998 1,326

Profit after tax 681 705 998 1,326

Minority interest

Profit after minority interest 681 705 998 1,326

Equity shares outstanding (mn) 27.8 27.8 27.8 27.8

EPS (INR) basic 24.5 25.3 35.9 47.7

Diluted shares (mn) 27.8 27.8 27.8 27.8

EPS (INR) fully diluted 24.5 25.3 35.9 47.7

CEPS (INR) 31.5 34.0 48.2 62.3

Dividend per share 2.3 2.3 2.3 2.3

Dividend payout (%) 10.7 10.3 7.3 5.5

Common size metrics- as % of net revenues


Operating expenses 83.9 84.0 83.8 84.2

EBIDTA margins 16.1 16.0 16.2 15.8

Depreciation and amortization 2.0 2.3 2.4 2.2

Interest expenditure 3.9 4.2 3.8 3.1

Other income 0.7 0.7 0.5 0.4

Tax 3.6 3.2 3.4 3.5

EBIT 14.1 13.7 13.8 13.5

Net profit margins 7.3 6.8 7.1 7.4

Growth metrics (%)


Revenues (1.9) 10.5 36.4 28.3

EBITDA 4.5 9.8 38.1 25.1

Net profit (7.9) 3.5 41.6 32.8

EPS (7.9) 3.5 41.6 32.8

Construction


Peer Comparison

Note: * for implied construction business Source: Edelweiss research

Balance Sheet (INR mn)

As on 31st March FY12 FY13E FY14E FY15E

Share capital 278 278 278 278

Reserves and surplus 4,112 4,744 5,669 6,922

Shareholder funds 4,390 5,022 5,947 7,200

Preference share capital - - - -

Minority interest - - - -

Long term borrowings 474 2,224 2,474 2,474

Short term borrowings 1,232 1,282 1,332 1,382

Loan funds 1,706 3,506 3,806 3,856

Deferred tax liability/asset 42 42 42 42

Sources of funds 6,138 8,570 9,795 11,098

Tangible assets 1,468 3,727 3,884 3,979

Intangible assets - - - -

CWIP (incl. intangible) 598 598 598 598

Total net fixed assets 2,066 4,325 4,482 4,577

Non current investments 1 1 1 1

Current investments 0 0 0 0

Cash and cash equivalents 1,139 935 951 1,090

Inventories 2,753 3,099 4,149 5,274

Sundry debtors 888 954 1,262 1,521

Loans & advances 535 586 799 1,025

Other current assets 1,175 1,287 1,754 2,251

Total current assets (ex cash) 5,352 5,925 7,964 10,071

Trade payable 509 604 1,482 2,405

Other current liabilities & prov. 1,910 2,012 2,121 2,236

Total current liab. & provisions 2,419 2,617 3,603 4,641

Net current assets (ex cash) 2,932 3,309 4,361 5,431

Application of funds 6,138 8,570 9,795 11,098

Book value per share (BV) 158 181 214 259

Cash flow statement (INR mn)


Net profit 681 705 998 1,326

Add: Depreciation 189 241 343 405

Add: Deferred tax 6 0 0 0

Add: Others 0 0 0 0

Gross cash flow 876 946 1,341 1,731

Less: Changes in W. C. (352) 376 1,052 1,069

Operating cash flow 1,228 569 289 661

Less: Capex 516 2,500 500 500

Free cash flow 712 (1,931) (211) 161

FY13E FY14E FY13E FY14E FY13E FY14E

JKIL 112 8.7 6.1 5.3 3.9 15.0 18.2

NCC * 190 9.9 5.4 7.3 5.7 2.8 4.9

IVRCL 166 NA NA 16.9 10.4 NA NA

Simplex 153 14.1 13.2 6.3 5.9 4.9 5.0

Average 155 6.7 3.2 8.9 6.5 3.8 6.1

Company Market cap

(USD mn)

Diluted P/E (X) EV/EBITDA (X) ROAE (%)

Cash flow metrices


Operating cash flow 1,228 569 289 661

Financing cash flow (41) 1,727 227 (23)

Investing cash flow (516) (2,500) (500) (500)

Net cash flow 671 (203) 16 139

Capex (516) (2,500) (500) (500)

Dividends paid (73) (73) (73) (73)

Share issuance / (buyback) 0 0 0 0

Profitability and liquidity ratios


ROAE (%) 16.7 15.0 18.2 20.2

ROACE (%) 22.5 19.1 21.0 23.4

Current ratio 2.7 2.6 2.5 2.4

Average working capital turnover (x) 2.4 2.5 2.9 3.0

Average capital turnover ratio (x) 1.6 1.4 1.5 1.7

Net debt/equity 0.1 0.5 0.5 0.4

Debt/Equity 0.4 0.7 0.6 0.5

Debt/EBITDA 1.1 2.1 1.7 1.4

Operating ratios


Total asset turnover 1.6 1.4 1.5 1.7

Fixed assets t/o (x) 3.4 2.4 2.1 2.7

Equity turnover 2.3 2.2 2.6 2.7

Valuations parameters


EPS (INR) (Adjusted) 24.5 25.3 35.9 47.7

Y-o-Y growth (%) (7.9) 3.5 41.6 32.8

CEPS (INR) (Adjusted) 31.5 34.0 48.2 62.3

P/E (x) 9.0 8.7 6.1 4.6

Price/BV(x) 1.4 1.2 1.0 0.9

EV/Sales (x) 0.7 0.8 0.6 0.5

EV/EBITDA (x) 4.5 5.3 3.9 3.1

Dividend yield (%) 1.0 1.0 1.0 1.0

Basic EPS (INR) 24.5 25.3 35.9 47.7

Basic P/E (x) 9.0 8.7 6.1 4.6



Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

01 Oct 2012 Kamal Gupta Buy 60931

11 Dec 2012 Nalin Gupta Buy 21565

8 Jan 2013 J. Kumar Minerals & Mines Buy 188477


23 Jan 2013 J. Kumar Software Systems (I) Buy 50000



*as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

07 Jun 2012 Aashirwad Vincom Sell 300000 160.5

07 Jun 2012 Pacific Corporate Services Buy 300000 160.5

07 Sep 2012 Mentor Capital Buy 231891 199.9

17 Dec 2012 Amcap Fund Buy 1298650 226

17 Dec 2012 Pradeep G Rathod Sell 150000 226

08 Jan 2013 J. Kumar Minerals & Mines Buy 188477 234.1


Holding – Top4 Perc. Holding Perc. Holding

American Funds 4.68 Mentor Capital 3.47

Cresta Fund 2.78 Anand Rathi Global Finance 2.77


Additional Data

Directors Data

Mr. Jagdish Kumar Gupta Chairman and Managing Director Mr. Kamal J Gupta Executive Director

Mr. Nalin J Gupta Executive Director Dr. R. Srinivasan Independent Director

Mr. Padmanabh P. Vora Independent Director Mr. Ashwani Kumar Independent Director

Auditors - Gupta Saharia & Co. Chartered Accountants


Construction


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Construction

Consolidated Construction Co., Hindustan Construction Co., IL&FS Transportation Networks, IRB Infrastructure, IVRCL Infra, Jaiprakash Associates, BL

Kashyap & Sons Ltd, Nagarjuna Construction Co, Ramky Infrastructure, Sadbhav Engineering, Simplex Infrastructures Ltd

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 118 46 17 181

* - stocks under review

Market Cap (INR) 117 57 7

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

Recent Research

21-Feb-13 Ramky

Infrastructure

Fixed price contracts hammer

down earnings; Result Update

77 Hold

19-Feb-13 Sadbhav

Engineering

Execution improvement in

sight; Result Update

114 Buy

18-Feb-13 Simplex

Infra.

Balance sheet concerns

intensify;

Result Update

164 Hold

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to



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