Investment Ideas

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Buy Jkumar Infraprojects Limited


INVESTMENT RATIONALE

Jkumar Infrastructure Ltd is a civil engineering and infrastructure company with expertise in development of roads, flyovers, bridges,railway over bridges, irrigation projects, commercial and residential buildings, railway buildings, and sky -walks. Company also undertakes piling work and owns a large fleet of equipment and machinery for internal as well as leasing purpose. Company has been most active in Mumbai region and plans to explore on other key regions like Pune,Aurangabad, Haryana, MP etc

Key Developments - Robust order book 3.2x FY09 sales

Company's order book stands at ~Rs 1,311 crore spread across different segments -Transport Engineering (85%), Civil construction (6%) and balance from irrigation and piling work. Theorder book of company has been on a continuous rise and has grown at a CAGR of 353% from FY05 to FY09 and is expected to grow at a CAGR of 59.7% over FY09-FY12E mainly driven by civil construction and transport engineering segments. On the back of robustorder book and timely execution of projects company's sales have grown at a CAGR of 236.7% from FY05 to FY09 and are expected to grow at a CAGR of 78% from FY09-FY12E to Rs 1,243.4 cr.

Capex plans of Rs 40-50 crore each in next 2 years to strengthen the fleet size

Jkumar Infrastructure Ltd average ticket size of orders is Rs 35-40 crore and in order to bid for higher ticket size projects and improve its margin company will need to incur a capex of ~Rs 40-50 crore in FY10 and FY11 respectively. Management has guided a capex of Rs 30crore in FY10 to purchase 5nos machineries and Rs 45 crore in FY11 to purchase 17nos machineries, however we believe looking at the scalability and orders to be executed in FY10 & FY11 we anticipate capex of Rs 40 crore in FY10 and Rs 55 crore in FY11.

Valuations

JKumar Infrastructure strong order book of Rs1,311 crore provides significant earnings visibility and its large fleet of owned machinery coupled with low debt-to-equity is expected to support the companies operating performance and profitability. Despite superior returns and minimal leverage company is trading at a significant discount to its peers and therefore we initiate coverage with a "Buy" rating on the stock with target price of Rs 245 giving an upside potential of 23% from current levels. At the CMP of Rs198 the stock is trading at 6.5x its FY10E EPS of Rs 30.6 and 3.5x its FY10E EV/EBIDTA .

Buy Usha Martin Ltd

Company Profile

Established in 1961, Usha Martin Ltd. (UML) is a Rs 3000 crore conglomerate with global presence in Europe, S.E. Asia, Middle East and USA. The company is India's largest and world's second largest steel wire rope manufacturer. UML has three divisions — Steel, Wire & Wire Ropes and Others. The nine manufacturing facilities of UML are located at Jharkhand (four units), U.P. (two units), Karnataka, Punjab and Tamil Nadu.

Investment Rationale

Product mix comprising value added products, ensuring higher realizations UML has a diverse product portfolio that ranges from pig iron /hot metals to wire ropes and strands, in which the company is a world leader.The company has a growing proportion of value added products in its offerings, thus ensuring higher realizations.

Backward integration to result in lowering key input costs

UML is one of the very few integrated steel and wire rope manufacturers in the world that have direct access to raw materials like coal and iron ore. The company has captive iron ore mines, a captive coal block, and captive power plant. The direct access to mineral resources and power will help the company in reducing key input costs.

Capacity expansion to translate into volume growth

UML is in the final stages of implementing Rs 2100 crore expansion plan, which will help the company in driving volume growth, reducing overall cost and significantly improve the margins. With expansion plans in their last leg, the company is on its way to substantially increase its mining, iron and billet making capacities, as well as increase its value added products.

International presence

UML has a strong international presence with overseas manufacturing facilities in US, UK, Thailand and Dubai.The international business accounted for almost 30% of the company's total business in FY09. This share is expected to go up in future.The company also has distribution
centres in Canada, Mainland Europe, South Africa, Australia and South East Asia

Outlook & Recommendation

With the revival of demand, completion of capex and strength of integration, UML is on the verge of expanding its business — both topline and bottom-line. We recommend BUY rating on the stock with a 12 months target price of Rs 125, at 12x FY12 earnings, giving it an upside potential of 36% from the current levels.

BUY Transformers & Rectifiers (India) Ltd

Company Profile

Transformers & Rectifiers (India) Ltd (TRIL) is one of the leading manufacturers of 220 kv class power transformers with the market share of around 8%. It also manufactures industrial transformers such as furnace transformers and rectifier transformers. Majority of its revenues come from dominant power sector transformers. TRIL has recently commissioned its Moraiya facility (Gujarat), which enables it to manufacture transformers up to 765 kv class

Investment Rationale

Large investment plans of Government in power sector- huge opportunity
for TRIL:

GOI have plans to increase its power generation capacity from the current 156 GW to 220 GW by 2012. This will generate demand of 120,000 MVA of new transformers every year during the 11th five-year plan (assuming 60% target achievement during the period). Transformers installed during 1980-85 are expected to be replaced arising a replacement demand of 20,000 MVA of transformers.India-made transformers are technologically at par with international
products and are well accepted abroad. Domestic players have created enough capacities to cater to export demand. We expect export demand to be around 18,000 MVA, year on year. This will bring the opportunity of around 158,000 MVA per annum for next three years for the companies like TRIL.

Maintaining healthy Order Book – current order book of Rs 3.25 bn:

TRIL has healthy unexecuted order book of Rs 3.25 bn. Power & Distribution transformers accounts for 85% (132 kv and above)and 9% respectively in the total order book.

Majority of revenues from SEBs and utilities - protects topline:

Revenues from SEBs and power utilities are steady and volume based business because of aggressive capacity addition plans by the Government of India on power sector during various five-year plan.This fairly protects the topline of the company (volume wise) even in economic slow down scenario.These utilities contributed 70% and 65% to the top line in FY09 and 9M FY10.

Outlook & Recommendation

At the current market price of Rs 365, the stock is trading at a P/E of 12.3x, 10.4x and 8.7x of FY10E FY11E and FY12E earnings of Rs 29.8, Rs 35 and Rs 41.8 respectively. We recommend BUY rating on the stock with a target price of Rs 502/- (38% upside) in 18 months at the P/E
of 12x on FY12 earnings of Rs 41.8 .


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