HDFC Securities has recommended a high-quality small-cap stock with strong fundamentals. The stock has a potential upside of 85% and can be a multibagger in 2019.
The recommended stock is JMC Projects (India). Click here to read the research report.
The market price is Rs. 88.
The target price is Rs. 163.
This means that JMC Projects (India) can give a huge gain of 85% to investors in the medium to long-term. It is a multibagger recommendation.
JMCP 2QFY19 revenue came at Rs 7.3bn (11.3% YoY, 6.5% QoQ). EBITDA margins of 10.6% (+90bps higher than expected) and an effective tax rate of 23.7% led to a higher PAT of Rs 301mn (+49% 2QFY19 beat).
JMC bagged new order worth Rs 34.6bn in 1HFY19 (Rs 0.6bn in 2QFY19) excluding Rs 5.1bn won in Oct-18 and L1 of Rs 6bn. This has resulted in order backlog Rs 101.3bn (ex L1 of Rs 6bn). Order inflow guidance was maintained at Rs 55bn with incremental wins now targeted in buildings segment. Standalone net debt reduced to Rs 6.5bn (lower Rs 1.3bn QoQ).
Infra’s share in revenue is expected to growth to 35% by FY19E vs. 25% in 1HFY19.
This shall aid meeting 15% revenue growth guidance. MP irrigation order (Rs 16bn) is expected to start from FY20E, giving growth visibility to FY20E financials. We have increased FY19/20E EPS by 28.5/30.5%. Maintain BUY with an increased SOTP of Rs 163/sh.
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Highlights of the Quarter
● BOT projects refinancing key for reducing cash burn: Avg. daily toll collection increased from Rs 4.4mn/day YoY to Rs 5mn during 2QFY19, 13% revenue growth (excluding overloading). Loss funding of Rs 220mn was incurred during 1HFY19 and Rs 380mn would be required for 2HFY19E. JMCP is trying for refinancing of 2 BOT assets by FY19E end which shall avoid further Rs 800mn of loss funding during FY20E.
● Debt reduction a positive: JMCP reduced standalone net debt by Rs 1.3bn QoQ to Rs 6.5bn. With pick up in execution the gross debt will ramp up to Rs 7.5bn (vs. Rs 7bn in 2QFY19). BOT assets refinancing will help partly recoup equity investment and aid deleveraging.
● Near-term outlook: We expect building segment order wins to pick up as JMCP’s private clients resume new launches in 2HFY19E. With a strong order backlog JMCP may now bid at higher margins. BOT assets are still facing repayment issues and will require JMCP standalone support in case refinancing gets delayed. This will be an overhang in the near term.
Investment rationale of JMC Projects (India)
2QFY19 Revenue: Rs 7.3bn (+11% YoY, +7% QoQ, 5% above estimate)
EBITDA: Rs 774mn (+18% YoY, +9% QoQ, 14% above estimate)
Margins were at 10.6% (vs our estimate of 9.7%)
Tax rate was lower than estimated at 23%. Margins expansion and lower taxes resulted in PAT beat of 48.9%
We have revised our EBITDA margins estimate upwards by 85bps for FY19/20E in line with the 1HFY19 performance and with newer wins expected to have a better profile (with a comfortable backlog, JMC is not compromising on margins)
We have also lowered Effective tax rate from 33% to 28/30% in FY19/20E
Execution will pick up from 2HFY19E as Infra segment to pick up (contributing 30-35% by FY19 end vs 25% now)
We expect the double digit margins to sustain in the future given the order mix
Strong CFO will be sufficient to provide support for BOT projects (in case debt refinancing gets delayed)
2QFY19 inflows of >39bn largely infra driven
Despite achieving cash break even at BOT level, if refinancing for two BOT assets doesn’t materialize by Mar-19, loss funding could be ~Rs 800mn in FY20E
Revenue to grow at a CAGR of 14.9% over FY18-20E aided by revival in building segment and increasing share of infrastructure projects in order book
Double digit margins to continue over FY19-20E
APAT will grow by 12.6% CAGR over FY18-20E
Outlook And Valuation
Maintain BUY with increased Target Price Of Rs 163/Sh
● We have valued the core construction business at 18x one-year forward Mar-20E EPS at Rs 138/share. This is in line with other established players like Ahluwalia. Our rationale behind this is (1) Order book of ~Rs 100.1bn (3.1x FY19E revenue) provides near term visibility, (2) Amongst the top 5 players in the Buildings segment with robust execution credentials and (3) Balance sheet with net d/e of ~0.7x largely pertaining to BOT equity exposure of Rs 7.2bn).
● JMCP has been continually adding to its infra portfolio where opportunities are galore across diversified segments. Investment in the building segment would remain robust on the back of institutional and industrial demand in addition to NBCC, CPWD and private capex in the segment (though JMCP has been selective here in recent times).
● BOT equity monetization remains crucial for further re-rating.
We maintain BUY rating with an increased TP of Rs 163. We value the core construction business at Rs 138/share (18x one-year forward Mar-20E EPS) and Equity invested in BOT at a 40% discount at Rs 25/share.