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Jaiprakash Associates (JPA)
Others
Diversified presence absorbs weakness in cement. Jaiprakash (JAL) reported strong
cement volumes (+63% yoy) and robust construction revenue (+71% yoy). JAL
continues to tread the strong capex path having incurred a consolidated capex in excess
of Rs31 bn, in addition to funding of project SPVs to the extent of Rs18.3 bn. We
remain optimistic on the growth prospects of JAL given the expansion across business
segments and reiterate our BUY rating with a revised target price of Rs155/share.
Results meet estimates, construction margins restored
JAL reported revenues of Rs29.9 bn, operating profits of Rs6.8 bn and net income of Rs1.1 bn for
2QFY11 against our estimate of Rs26 bn, Rs6 bn and Rs1.2 bn, respectively. Higher-thanestimated
revenues were on account of (1) better cement volumes (63% yoy) and (2) higher-thanestimated
execution in construction and real estate segments. Construction margins returned to
normalized levels of 21% after a disappointing 7% margin reported in 1QFY11. Cement
realization were weak on account of nation wide pricing weakness in 2QFY11. However, sharp
increase in effective tax rate on account of deferred tax component of Rs1.2 bn (total tax rate of
61%; current tax rate 20%) dented the overall profitability. We discuss below in detail individual
performances of each of the segments of JAL.
CMP of Jaypee Infratech and JPVL implies a fair valuation of Rs173/share
JAL’s current market price implies a 53% 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 SOTP of DCF-to-equity valuations of power projects. We note that if we were to
value JAL based on market value of JIL and JPVL, our fair valuation would be Rs173/share. Even
after factoring a holding company discount of 20% for both these subsidiaries, the valuation
would be Rs153/share (see Exhibit 3).
Maintain BUY rating with revised target price of Rs155/share
We maintain our BUY rating with a revised target price of Rs155/share as we adjust for (1)
commissioning delays in JPVL’s power projects and (2) adjust for increased project cost of power
projects and (3) adjust for weakness in cement realization and margins. 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 ins subsidiaries at book value at Rs5/share.We note that the standalone entity has a
net debt of Rs49/share.
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