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Jaiprakash Associates (JPA)
Others
Analyst meet—emphasis on growth trajectory. In optimistic commentary, Jaypee
Group management indicated aggressive growth plans for all the business verticals of
the group. We do not rule out delays in execution, but we continue to like JAL on
account of (1) discount to value of real estate and power subsidiaries, (2) strong
execution record, and (3) upsides to our fair value estimates across business verticals.
We reiterate our BUY rating with a target price of Rs155/share.
Charting the growth trajectory across business verticals
Jaypee Group management has indicated aggressive growth plans across business segments
comprising cement, construction, power and real estate. JAL plans to increase total cement
capacity from the current level of 22.8 mtpa to 37.6 mtpa (on a consolidated level) by end
FY2012E and installed capacity in its power business from 700 MW to 7.8 GW by FY2015.
Management has indicated satisfactory progress in the construction of the Yamuna Expressway
with likely commissioning by CY2011. We discuss below in detail some highlights of the
management meet.
Potential upsides to our value of cement, power and real estate business
We believe JAL offers a number of potential upsides that have not been factored into our fair
value estimate.
Power. We do not ascribe value to JPVL’s portfolio of planned projects but highlight that
traction on these projects (especially Karchana) could be a key upside risk to our target price.
We note that inclusion of Karchana into our SOTP could add another Rs14/share to our target
price for JAL. We also factor in only 20% merchant sale from Karcham Wangtoo, although a
favorable court verdict could allow for 100% merchant sale from the project allowing JAL to
capitalize on the favorable tariffs for short-term sale of power.
Real Estate. We currently ascribe value of Rs5 bn to Sports City (book value of investment
made by JPA) but highlight that visibility on development of Sports City could be a key upside
trigger for the stock. Our valuation for Jaypee Infratech includes only the Noida land parcel and
the Yamuna Expressway project and the development of the remaining four land parcels could
accrue incremental value to our target price of JAL.
Cement. We currently factor in standalone cement volumes of 15.4 mn tons in FY2011E and
17.1 mn tons in FY2012E, and highlight that speedier stabilization of units could likely lead to
higher-than-estimated volume growth.
Maintain BUY with a target price of Rs155/share
We maintain our BUY rating with a target price of Rs155/share. Our SOTP-based target price
includes Rs64/share for the standalone business which includes (1) cement business at
Rs65/share valued at 6X EV/EBITDA, (2) construction business at Rs38/share valued at 6X
EV/EBITDA, (3) Real estate business at Rs4/share which includes Jaypee Green, Greater Noida
and (4) investment in subsidiaries (JPSK Sports City, Ganga Expressway and Himalayan
Expressway) at book value at Rs5/share.We note that the standalone entity has a net debt of
Rs49/share. We ascribe Rs37/share for 83% stake in JIL and Rs43/share for 76.3% stake in
JPVL along with Rs8/share for direct holding of 45% in Karcham Wangto
CMP of Jaypee Infratech and JPVL implies a fair valuation of Rs175/share
JAL’s current market price implies a 35% holding company discount for its ownership in the
power and real estate subsidiaries. Our valuation for Jaypee Infratech is based on March 12-
based NAV while for JPVL it is the SOTP of DCF-to-equity valuations of power projects. We
note that if we were to value JAL based on the market value of JIL and JPVL, our fair
valuation would be Rs175/share. Even after factoring a holding company discount of 20%
for both these subsidiaries, the valuation would be Rs155/share.
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