Jaiprakash Associates: Pickup in Construction Drives Upside : Morgan Stanley

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Jaiprakash Associates: Pickup in Construction Drives Upside Surprise

Strong top line carries the day despite margin
weakness: Jaiprakash reported a strong F2Q11 top line
performance. Total revenues grew 63% YoY to Rs30.7
bn, 10% ahead of our estimates. However, the story on
the margin front was a bit mixed. Cement margins
dropped significantly, but the uptick in construction and
real estate margins nearly made up for it, along with the
increased share of the high-profitability real estate
segment (revenue share moved up from 5% in F1Q10 to
11% in F1Q11). Despite a 280 bps margin compression,
EBITDA for the company as a whole grew only 46% YoY,
11% above our estimates.
Construction business back on track as expected,
after F1Q11 weakness: The construction division had
registered both a slowdown in revenue growth and the
worst margins in five years in F1Q11, due to disruption
in two of the company’s projects, Sreesailam and
Baglihar. In F2Q11, we believe that while work has
begun in a small way at Sreesailam, the division has
also begun to book revenues on thermal power plant
construction (for Jaiprakash Power) and the real estate it
is building out for Jaypee Infratech. This helped the
division register 73% YoY growth in revenues, coupled
with a 110 bps YoY increase in margins (to 20.9% in
F2Q11).
No change in cement story: great volumes + weak
margins: The division registered volume growth of 59%
YoY, driven by the ramp-up of production from capacity
expansions in the last 2-3 quarters. However, a 10%
decline in pricing coupled with the increased
depreciation from the capacity resulted in a fall of
10.5ppt in EBIT margins (in line with the rest of its peers)
to 15.6%. Given the recovery that has begun in cement
pricing after the monsoon, and the easier comps in the
next two quarters (Exhibit 8); we do not expect the trend
of falling margins to continue across F2011e.


Strength below the operating line too: With construction
leading the growth rather than cement, the uptick in interest
and depreciation costs as cement capacity became
operational didn’t match the uptick in operating profits, leading
PBT to jump 64% YoY%, around 21% ahead our forecasts.
While net profit (adjusted for one time items) at Rs1.17 bn was
down 34% YoY (because of a massive increase in deferred
tax), we prefer using PBT as the benchmark for comparison
rather than net income.

Remains a favored play: Over the next two three years, we
expect Jaiprakash to emerge as a top-5 player in India in each
of its main businesses: cement, construction, and power. We
believe the company has sustainable advantages in each of
its businesses