Buy J. Kumar Infraprojects; target of Rs 273: CD Equisearch

CD Equisearch's research report on J. Kumar Infraprojects

With influx of sizeable order inflows last fiscal - MMRC's two packages of Mumbai Metro Line 3 valued at Rs 5012 crs, DMRC's two packages of Mumbai Metro Line 2 worth Rs 1345 crs and ~Rs 450 crs Santacruz-Chembur Link Road extension contract - order book all but trebled to Rs 9335 crs ($1439.7m) last fiscal with its transportation business cornering ~97% of the pie. With most orders criss-crossing city of Mumbai, State of Maharashtra's order book share swelled to an unprecedented 95.3% last fiscal (just 46.9% in FY14). Strikingly, its metro segment has gobbled over 70% of the order book with Mumbai Metro constituting more than two-thirds.

Outlook

The stock currently trades at 14.2x FY18e EPS of Rs 16.34 and 11.9x FY19e EPS of Rs 19.51. Stoked by miserable execution, earnings growth faltered last fiscal, pressuring return on capital as a result. Not oblivious of geographical and client concentration risks (majorly government agencies), cluster of similarly typed orders (read: metro orders) would undoubtedly reinforce execution. Earnings would rise by 19% on average over the next two years on stable margins - rise in margins partly suppressed by rising manpower costs. On balance, we retain our buy recommendation on the stock with revised target of Rs 273 (previous target: Rs 306) based on 14xFY19e earnings over a period of 9-12 months (peg ratio: 0.7); PEG lowered to factor in susceptibility of order billing to ever-haunting external factors.

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