J Kumar Infraprojects- OPM pressure leads to lower growth; 4Q to pick up: Anand Rathi

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J Kumar Infraprojects
OPM pressure leads to lower growth; 4Q to pick up
J Kumar’s 3QFY11 revenue rose 24% yoy. Compression in OPM
and increase in finance costs led to net profit growth of only 8%
yoy. We estimate a better 4QFY11, led by more revenue booking.
We maintain our Buy rating and target price of ` 218.

 Revenue growth of 24% yoy was in line with estimate. However,
PAT growth was slightly lower than estimate due to a lower OPM.
 OPM decline. OPM for the quarter was 14.2%, down 90bps yoy
and 170bps qoq due to pressure from fixed costs, up 62% yoy.
However, we expect OPM would recover in 4Q to over 15%.
Interest charges, at `65m, rose 113% yoy and 9% qoq due to a rise
in bank-guarantee charges on account of higher bidding.
 Order book. J Kumar's order backlog is `13.1bn (2x FY10 sales).
Orders have been slow in the past two quarters due to the drying
up of road cash contracts, political turmoil in Maharashtra (its past
dependence) and intense competition in other states. The situation
is expected to improve, with orders of `4.8bn at the ‘L1’ stage,
mainly from Gujarat and Delhi, and bids in place for orders of
`30bn. The company is also pre-qualified for BOT road projects
of `15bn.
 Valuation and Risks. We retain our target price of `218 based
on PE of 6.5x FY12e, implying ~45% discount to our target PE
of mid-cap construction companies. At our target price, the stock
trades at EV/EBITDA of 3.5x. Risks: Delay in project execution,
fewer orders and geographical concentration.