JMC Projects: Buy


JMC Projects has managed a successful turnaround, transitioning from a company with eroding net worth to one with a strong balance sheet in two years. Investors can consider exposure in the stock with a 2-3 year perspective. A strong order book, improving financials, enhanced bidding capacity and a strong corporate promoter who is actively involved in the management, buttress our recommendation.

At the current market price of Rs 373, the stock trades at 13 times its expected earnings for 2008-09. The stock has a small market cap of Rs 680 crore and may be subject to sharp volatility linked to movements in broad markets, necessitating phased investments.

From posting net losses in 2005, JMC Projects has returned to profitability in 2007 on the back of restructuring measures. The company reduced the proportion of fixed price contracts and passed on the burden of raw material costs to project owners. Wherever it had to undertake supply of raw materials, the company ensured that it has price escalation clauses built into contracts.

Two, JMC received a healthy infusion of equity through issue of warrants and rights offers. Three, with Kalpataru Power Transmission becoming a corporate promoter (JMC became Kalpataru's subsidiary in February 2007), the company has received cash infusion and full support from the former, which has helped it capitalise on the opportunities in the infrastructure space.

The above measures resulted in efficient cost management, substantial reduction of debt, improved bidding capacity (as a result of higher net worth) and entry into newer areas of infrastructure such as civil works for power projects.

JMC Projects had an order book of Rs 2,100 crore in December 2007, with infrastructure accounting for about 40 per cent and civil and power projects for the rest. While the order book of over four times sales for FY 2007 does appear challenging, change in management, doubling of workforce and a 54 per cent increase in asset base in 2007 suggest that the company has been preparing to face execution challenges.

Given JMC's strength in civil construction, the company may be among the beneficiaries of the recent increase in Budget allocation for urban infrastructure, drinking water and sanitation development projects to be taken up by the States. We believe that orders in these segments would be more in number but less in terms of value, involving higher participation by mid-sized companies such as JMC.

While Kalpataru appears to view JMC as a partner to supplement its own skills in the civil and infrastructure space, any move by Kalpataru to merge JMC remains a key risk, as the returns in that event will depend on the swap ratio