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Sowmya Sundar

SHAREHOLDERS of JMC Projects can reject the open offer at Rs 40. The stock appears to have better prospects for growth after the change in control. Post-acquisition, the company could benefit from higher order inflows from Kalpataru Power (the acquirer), one of the leading players in the construction of the power transmission lines and towers. JMC is in the civil construction and commercial segment. The backing of Kalpataru will help it bid for higher value orders. Risk-averse investors can offload the shares in the open market, where the stock is trading at a premium to the offer price.

Offer details

Kalpataru Power Transmission has acquired 32.2 per cent stake in JMC Projects from its promoters. The company has made an open offer to acquire 25 per cent of the equity from the public at Rs 40 per share. The offer, managed by Enam Financial Consultants, closes on December 13.

Rationale

JMC has expertise in handling civil construction contracts and commercial complexes. The company has been executing contracts in Rs 60-70 crore range. With the execution of the Bombay-Mehsana Highway project, JMC established its presence in the road and highway segment too. JMC has orders worth Rs 300 crore.

The acquisition provides the company an opportunity to enhance its presence in the infrastructure segment. Due to its high debt burden, JMC may not be able to take on high-value projects on its own. Financial constraints could be a roadblock to winning high-value bids. With the backing of Kalpataru, there is a possibility of upgrading to high-value projects for Kalpataru itself.

Kalpataru takes up turnkey projects for building high voltage transmission lines (up to 400/500 kV). Substantial investments are expected in the power transmission sector in the next four/five years. Acquisition of JMC would be a strategic fit for Kalpataru as the later would be able to use the civil construction expertise of the former for its construction projects. Kalpataru takes up projects on a turnkey basis and JMC can provide support in civil construction.

JMC has turned around in the half year ended September 2004 after posting a loss in 2003-04. There was a sharp rise in both revenues and profitability as the order backlog was strong at the beginning of the fiscal 2004-05. Despite the high interest costs, a strong pickup in revenues could scale up profitability. Moreover, both Kalpataru and JMC have introduced price escalation clauses for their projects. This should insulate them from any sharp drop in profitability attributable to higher input costs.

The offer price is substantially lower than the current market price. Hence, the acquirers may not be able to get a majority control on the company unless the offer price is revised.

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