Sunday 20 January 2008

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.