The Hindu Business Line : JMC Projects: Avoid/Sell in open market

SHAREHOLDERS can consider rejecting the rights offer of JMC Projects, being offered at Rs 45. As the market price could fall post-rights, investors can sell the stock to prevent erosion in the value of their holdings.

Losses for the last two years, tapering operating margins and increasingly stiff competition are factors that make the stock unattractive vis-à-vis its peers. We believe that there are better players in the sector at present.

Further, an unattractive deal to the shareholders of JMC Projects in the event of the company's merger with Kalpataru Power cannot be ruled out.

The JMC Projects share is trading at Rs 74 with a book value per share of Rs 12.6 for the 12-month period ended March 2005. A significant portion of the proceeds from the rights issue is to be utilised towards purchase of capital equipment, long-term working capital needs and repayment of debt.

JMC Projects has seen a 76-per cent erosion in net worth over the past three years. This can be attributed largely to the absence of augmentation in topline, increasing raw material cost and high level of bad debts. The high prices of steel and cement — primary raw materials for the construction sector — have caused a huge dent in the company's operating margin (OPM), which was 1.6 per cent in 2005.

Its peers, who encountered a similar situation, recorded OPMs in the 6-10 per cent range. The strategy JMC plans to adopt (as per the offer document) to improve margins does not appear to have the potential to deliver for the following reasons:

The company plans to enter into rate contracts with cement suppliers. A similar strategy may not be feasible for steel prices, given its high volatility. The plan to have in place an escalation clause is also fraught with the risk of diminishing its chances of success in a competitive bidding environment.

With an increasing number of players becoming engineering, procurement and construction (EPC) providers, JMC's plan to devolve raw material procurement to clients may find few takers.

Projects undertaken by JMC and its current order backlog appear to indicate that it has not been able to capitalise on the Government's recent thrust on infrastructure spending. Barring one project, it has not ventured into the build-operate-transfer (BOT) model, which has scope for providing attractive returns. The company has also not made any aggressive attempts to enter into strategic alliances with bigger players to enable qualification for new projects.

In February 2005, Kalpataru Power Transmission acquired a 46-per cent stake in the company through a share purchase agreement and is now a corporate promoter of JMC Projects.

This alliance may culminate in Kalpataru becoming a parent company at a later stage. Kalpataru Power has strong fundamentals and benefits to JMC from the association cannot be ruled out.

As the offer document does not provide concrete information on JMC's growth roadmap arising out of this alliance, the prospects are not yet clear. Any significant synergies arising out of this association would improve JMC's prospects and, as such, will be the key risk to our call.

Offer details: The rights offer is made in the form of shares and convertible warrants.

The share offer is at the ratio of three equity shares for every two held, at Rs 45 per share. The detachable warrants are offered as two convertible warrants for every two equity shares held.

The warrants are convertible in the ratio of one equity share for every two warrants, 12 months from date of allotment, up to the completion of 18 months.

The floor price for the conversion of warrants is Rs 50 per equity share. Edelweiss Capital is the lead manager to the issue, which opened on July 11. The offer closes on August 11.

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