J KUMAR INFRAPROJECTS Mumbai site visit boosts execution confidence

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1 India Midcaps COMPANY UPDATE J KUMAR INFRAPROJECTS Mumbai site visit boosts execution confidence India Equity Research Infrastructure - Construction We visited J Kumar Infraprojects (JKIL) JNPT and Mumbai Metro projects work sites to gain insights into the pace of execution. Our observations: (1) work on Mumbai Metro Line 7 project is progressing rapidly; (2) after initial teething issues, execution on the JNPT and Mumbai Metro Line 2 projects is expected to pick up pace; and (3) preparatory work on Mumbai Metro Line 3 project is underway with tunneling work expected to commence by CY18 end. We are enthused by the progress in projects and believe JKIL s revenue is set for a sharp uptick in FY18/19. In our view, the company is the best bet in the EPC space on account of its robust revenue visibility (book-to-bill at >6x), healthy balance sheet (net debt:equity at 0.1x) and humungous opportunities (5 additional Metro projects coming in Mumbai itself). Ergo, we revise up FY19E P/E target from 15x to 18x and our target price to INR416 (INR343 earlier). Maintain 'BUY'. Mumbai projects: Work on in full swing Work on the JNPT and Mumbai Metro projects constitutes ~77% of JKIL s order book. Hence, they are critical in determining the company s execution trajectory. On Metro Line 7, JKIL is the first company (amongst 3 project contractors) to launch girders. While soil testing for Metro Line 3 project is underway, casting work to construct elevated piers has commenced on Line 2. Part of the JNPT project was facing utility shifting issues; these are expected to be resolved over the next couple of months. Urban infra segment: Huge opportunities up for grabs The Maharashtra government has approved 5 new Metro projects in Mumbai (overall cost ~INR440bn). In addition, projects like Trans Harbour Link, Mumbai Nagpur Expressway etc., will ensure robust ordering in the urban infra space. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: JKIP.BO, B: JKIL IN) CMP : INR 299 Target Price : INR week range (INR) : 308 / 105 Share in issue (mn) : 75.7 M cap (INR bn/usd mn) : 23 / 350 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q2FY17 Q1FY17 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) BSE Midcap Index Stock : Stock over Index 1 month months months (16.4) Outlook and valuations: Preferred pick; maintain BUY JKIL is our top pick in the EPC space owing to its robust balance sheet, burgeoning order book and niche presence in the urban infra space. With all major projects entering execution stage, we estimate healthy revenue growth. We maintain BUY with revised target price of INR416 (18x FY19E EPS). Financials Year to March FY16 FY17E FY18E FY19E Revenue (INR mn) 14,086 15,139 18,972 23,671 EBITDA (INR mn) 2,484 2,624 3,307 4,150 Adjusted profit (INR mn) 1,032 1,093 1,343 1,749 Dil. EPS (INR) Diluted P/E (x) EV/ EBITDA (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Parvez Qazi parvez.qazi@edelweissfin.com Rita Tahilramani rita.tahilramani@edelweissfin.com May 9, 2017 Edelweiss Securities Limited

2 Infrastructure - Construction Execution on Mumbai projects in full swing JNPT road projects Project details: JKIL has won 3 packages worth ~INR10.6bn. Overall length of the project is ~40km. Status: Land acquisition is pending only on a ~2km stretch, while utility shifting work is an issue on a ~10km stretch (expected to be completed by December 2017). On balance stretches, execution is on in full swing. Majority of the revenue generated till date from the project is for utility shifting work. There is still utility shifting work amounting to ~INR1.75bn pending. Timeline: Management expects the project to be completed by December Fig. 1: Structural work underway Fig. 2: Execution picking pace as majority of land acquired Source: Edelweiss research Mumbai Line 7 Andheri (E) Dahisar (E) Project details: Length: 5.9km; JKIL s package cost: INR3.6bn. Status: JKIL is ahead of other contractors in each of the work sub-segments, i.e., casting piers, erecting pier caps, casting U girders and launching them. JKIL is also the first to start pre-cast work for station development. This will save ~6-8 months in project completion. Timeline: Management expects to complete work by mid CY19. 2 Edelweiss Securities Limited

3 J Kumar Infraprojects Fig. 3: Erection of piers and pier cap in full swing Fig. 4: First company to launch U-girders Source: Edelweiss research Mumbai Line 2A D N Nagar Dahisar (E) Project details: JKIL has won both the packages on this project with 18.6km (initial) length and project cost of INR13.4bn. Status: Right of Way (RoW) is available for 80-85% of the stretch. While the piling work is in progress on package 1, design work on package 2 is underway. Timeline: Management expects to complete work by mid CY19. Fig. 5: Piling work underway Source: Edelweiss research 3 Edelweiss Securities Limited

4 Infrastructure - Construction Mumbai Metro Line 3 Project details: JKIL has won 2 packages worth ~INR50bn on Line 3. Status: Utility shifting is in progress at work sites. The company will use 5 tunnel boring machines (TBMs) for undertaking work. It will use 2 old TBMs which have earlier been used for the Delhi Metro project and will buy 3 new TBMs. The company expects to start the launch of TBMs in December Fig. 6: Excavation work in progress Mumbai infra market: INR800bn opportunity over FY18-19 Source: Edelweiss research JKIL is currently focusing on Mumbai, which is the company s stronghold and is likely to see development of large size marquee projects like Trans Harbour Link, Mumbai Nagpur Expressway along with 5 new Metro projects. Table 1: Mumbai infra opportunity for JKIL over the next 2 years Project Cost (INR bn) Status Mumbai Metro Line 2B (Dahisar (E) DN Nagar) 110 Tendering underway Mumbai Metro Line 4 (Wadala Ghatkopar- Mulund Teen Hath Naka (Thane) Kasarvadavali) 145 Tendering underway Mumbai Metro Line 5 (Thane-Bhiwandi-Kalyan) 84 Project likely to be awarded over the next 1 year Mumbai Metro Line 6 (Lokhandwala-Jogeshwari- Kanjurmarg) 67 Project likely to be awarded over the next 1 year Mumbai Metro Line 10 (Dahisar Mira-Bhayandar) 36 Project likely to be awarded over the next 1 year Mumbai Trans Harbour Link 175 Tendering underway Mumbai Nagpur Expressway 224 Project likely to be awarded over the next 1 year Total 841 Source: Government documents, Edelweiss research Tendering of Line 2B and Line 4 is underway; JKIL has bid for 1 package (INR5bn each) in each of these 2 projects. According to government clause, a single company can win a maximum of 4 packages combined in Line 2A, Line 7, Line 2B and Line 4. JKIL has already won 3 packages (2 in Line 2A and 1 in Line 7) and hence can win a maximum of 1 package in the current round of tendering. 4 Edelweiss Securities Limited

5 J Kumar Infraprojects JKIL ended Q3FY17 with order book of ~INR97bn, providing robust revenue visibility (>6x TTM revenue). Management is currently in consolidation mode and wants to keep the order book stable at ~INR100bn. Outlook and valuations: Bright prospects; maintain BUY With strong revenue visibility and management focus on profitable growth, we believe JKIL is poised to post robust earnings momentum. A strong balance sheet (net debt: equity at 0.1x) and niche presence in the urban infra space render JKIL our preferred pick in the EPC space. With all major projects entering execution stage, we expect healthy revenue growth. We maintain BUY with a revised target price of INR416 (18x FY19E EPS). 5 Edelweiss Securities Limited

6 Infrastructure - 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. Investment Theme JKIL, primarily present in the transportation (roads, metro, bridges and flyovers) space, has been on a high growth trajectory, posting a revenue and PAT CAGR of 53% each over FY Robust revenue visibility and diversification into new segments and geographies will be the springboard of stable growth in the future. 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. Key Risks Majority of JKIL s orders are from the transportation segment. This exposes it to concentration risk arising from exposure to a particular segment. 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. With increasing size of projects, JKIL will face competition from bigger, more experienced and established players. Such heightened competition can lead to margin dilution. 6 Edelweiss Securities Limited

7 J Kumar Infraprojects Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Order intake (INR bn) Y-o-Y growth (%) (4.4) (44.2) 13.2 Book-to-bill ratio (x) Order backlog (INR bn) Order backlog growth (%) (3.0) Revenue growth (% yoy) Raw Material (% net rev) Job work (as % of sales) Salary (% of revenues) Other admin (% net rev) Avg. Interest rate (%) Depreciation rate (%) Tax rate (%) Dividend per share Inc. in invts (INR mn) 1, Capex (INR mn) 552 1,010 2,710 1,710 Debtor days Inventory days Payable days Provisions days Loans & adv (% net rev) Incremental debt (1,615) 1, Income statement (INR mn) Income from operations 14,086 15,139 18,972 23,671 Direct costs 10,233 10,620 13,308 16,605 Employee costs 783 1,039 1,283 1,577 Other Expenses ,073 1,339 Total operating expenses 11,602 12,515 15,664 19,520 EBITDA 2,484 2,624 3,307 4,150 Depreciation EBIT 1,972 2,058 2,592 3,258 Add: Other income Less: Interest Expense Profit Before Tax 1,538 1,632 2,005 2,610 Less: Provision for Tax Reported orofit 1,032 1,093 1,343 1,749 Adjusted profit 1,032 1,093 1,343 1,749 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio (%) Common size metrics Operating expenses EBITDA margins Adjusted profit margins Growth ratios (%) Revenues EBITDA (0.9) PBT Adjusted profit EPS (6.9) Edelweiss Securities Limited

8 Infrastructure - Construction Balance sheet (INR mn) As on 31st March FY16 FY17 FY18E FY19E Share capital Reserves & Surplus 12,455 13,371 14,537 16,109 Shareholders' funds 12,833 13,749 14,916 16,487 Short term borrowings 3,251 4,251 4,951 5,651 Long term borrowings Total Borrowings 3,540 4,540 5,240 5,940 Long Term Liabilities Def. Tax Liability (net) Sources of funds 16,550 18,467 20,335 22,607 Gross Block 6,550 7,550 10,250 11,950 Net Block 4,299 4,732 6,717 7,525 Capital work in progress Total Fixed Assets 4,974 5,418 7,413 8,231 Non current investments 1,797 1,797 1,797 1,797 Cash and Equivalents 1,736 3,128 2,967 3,898 Inventories 4,861 4,566 5,789 6,221 Sundry Debtors 2,956 3,266 3,491 4,031 Loans & Advances 1,040 1,151 1,442 1,799 Other Current Assets 2,282 2,619 3,282 3,787 Current Assets (ex cash) 11,138 11,601 14,004 15,839 Trade payable 1,140 1,069 2,451 2,339 Other Current Liab 1,955 2,407 3,395 4,819 Total Current Liab 3,096 3,476 5,847 7,157 Net Curr Assets-ex cash 8,043 8,125 8,157 8,681 Uses of funds 16,550 18,467 20,335 22,607 BVPS (INR) Free cash flow (INR mn) Reported Profit 1,032 1,093 1,343 1,749 Add: Depreciation Interest (Net of Tax) Others (3,074) (615) (615) (1,648) Less: Changes in WC (1,351) (81) (32) (523) Operating cash flow 231 1,578 2,027 2,118 Less: Capex 2,338 1,010 2,710 1,710 Free Cash Flow (2,107) 568 (683) 408 Cash flow metrics Operating cash flow 231 1,578 2,027 2,118 Investing cash flow (2,338) (1,010) (2,710) (1,710) Financing cash flow 2, Net cash Flow 189 1,391 (160) 930 Capex (2,338) (1,010) (2,710) (1,710) Dividend paid (182) (177) (177) (177) Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Net Debt/Equity Interest Coverage Ratio Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) (6.9) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Dividend Yield (%) Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E J Kumar Infraprojects Nagarjuna Construction Co Simplex Infrastructures Ltd Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited

9 J Kumar Infraprojects Additional Data Directors Data Mr. Jagdish Kumar Gupta Executive Chairman Mr. Kamal J Gupta Managing Director Mr. Nalin J Gupta Managing Director Dr. R. Srinivasan Independent Director Mr. Padmanabh P. Vora Independent Director Mr. Ashwani Kumar Independent Director Mr. A.S. Chatha Independent Director Mrs. Kusum J. Gupta Promoter Director Auditors - Gupta Saharia & Co. Chartered Accountants *as per last annual report Holding Top10 Perc. Holding Perc. Holding Capital Research 9.24 Goldman Sachs India Fund Ltd 3.57 HDFC Asset Management 2.68 Birla Sunlife Asset Management 2.52 UTI Asset Management 2.35 Blackrock Global Funds 2.01 DSP Blackrock Investment Manager 1.44 Reliance Capital Trustee 1.32 Credit Agricole Groupe 0.95 HSBC Asset Management 0.46 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price 30 Aug 2016 Hdfc Standard Life Insurance Company Ltd Sell Jul 2016 Birla Sun Life Asset Management Company Ltd Ac Buy *as per last available data Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 19 Aug 2016 Jagdish Kumar Madanlal Gupta Buy Aug 2016 Kamal Jagdish Gupta Buy Aug 2016 Nalin Jagdish Gupta Buy Aug 2016 Nalin Jagdish Gupta Buy Aug 2016 Kamal Jagdish Gupta Buy *as per last available data 9 Edelweiss Securities Limited

10 May-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Oct-16 Oct-16 Nov-16 Dec-16 Dec-16 Jan-17 Feb-17 Feb-17 Mar-17 Apr-17 Apr-17 (INR) Infrastructure - Construction Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , research@edelweissfin.com Aditya Narain Head of Research aditya.narain@edelweissfin.com ` Coverage group(s) of stocks by primary analyst(s): Infrastructure - Construction Ahluwalia Contracts, Ashoka Buildcon, Hindustan Construction Co., J Kumar Infraprojects, KNR Constructions, NBCC, Nagarjuna Construction Co, PNC Infratech, Sadbhav Engineering, Simplex Infrastructures Ltd, Supreme Infrastructure Recent Research Date Company Title Price (INR) Recos 04-May-17 Hindustan Construction Company Arbitration money starts flowing in; Result Update 04-May-17 NBCC HSCL acquisition to result in synergies; Company Update 07-Apr-17 Ashoka Buildcon Diversifies into commercial realty development space; 46 Buy 199 Hold 212 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart J Kumar Infraprojects 10 Edelweiss Securities Limited

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