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JP Associates (JAL) reported robust yoy top-line growth of 62.6% for 2QFY2011
driven by strong revenue growth in the construction (73%) and cement (43%)
segments. JAL’s recurring earnings for the quarter de-grew 16.3% mainly on
account of the plunge in margins and higher tax provision. We expect JAL to
emerge as one of the fastest growing conglomerates in the cement, power and
real estate space going ahead. Hence, we maintain a Buy on the stock.
Top-line beats estimates; recurring earnings disappoint owing to margin pressure:
JAL reported robust top-line growth of 62.6% yoy to `3,071cr (`1,889cr),
significantly ahead of our estimates of 33.1% growth, aided by the strong 73%
and 43% growth in construction and cement revenues, respectively. However, EBIT
margins of the cement segment played spoil-sport and impacted overall OPMs,
which came in at 24.7% as against our estimate of 27.2%. Interest and
depreciation costs were in line with our estimates. Bottom-line de-grew 16.3% to
`115.5cr (`138cr) mainly due to higher tax provision for the quarter (61%).
Outlook and Valuation: We expect JAL to become one of the fastest growing
conglomerates and post top-line and bottom-line CAGR of 33.9% and 31.5%
respectively, over FY010-12. We have valued JAL’s cement business at 6.5x
EV/EBITDA (`62.7/share) and construction division at FY2012E target EV/EBITDA
multiple of 8.5x (`78.5/share). We have valued its power and real estate
businesses on market cap basis (giving 20% holding company discount)
contributing `81.8/share to our target price. The treasury shares (`11.1/share)
have been valued at the current market price, whereas net debt is accounted for
on a per share basis in our valuation at `65.1. We maintain a Buy on the stock
with an SOTP target price of `169, implying an upside of 35% from current levels.
Segment-wise performance
Cement division
JAL’s cement division reported revenue growth of 43.0% yoy to `1,208cr (`845cr),
12.8% above our estimate of `1,071cr. The divisional EBIT margin came in at
15.6% (26.1%), which was mainly on account of higher input cost and decline in
realisations. JAL currently has an installed cement capacity of ~24MTPA and
1HFY2011 dispatch volumes stood at ~7.3mtpa. We expect the company to
achieve dispatch volumes of 14.6mtpa and top-line of `5,107cr for FY2011. This
is assuming average realisation of `3,877/tonne (gross) for FY2011, which implies
a 10% hike in the cement price in 2HFY2011 over 1HFY2011. For FY2012, we
have factored in volume growth of 27% to 18.5mtpa and realisation of
`4,071/tonne (gross) resulting in top-line of `6,803cr, a yoy jump of 33%.
Construction division
The construction division registered 73.0% yoy surge in revenues to `1,571cr
(`908cr) as against our expectation of `1,100cr. Divisional EBIT margin came in at
20.9% (19.8%), which were in line with our estimates. We highlight that
construction margins returned to normalised levels in 2QFY2011 after registering
disappointing 7% margins in 1QFY2011. The construction division has posted
volatile numbers over the last few quarters. For FY2011 and FY2012, we are
penciling top-line of `7,815cr and `9,910cr, respectively. On the operating front,
we are factoring in EBIT margin of 15.2% and 17.8% for FY2011 and FY2012,
respectively.
Real estate division
The real estate division reported 265.5% yoy revenue growth to `323.cr (`88.4cr)
in line with our expectation of `300.4cr. The divisional EBIT margin came in at
41.2% (33.0%), which were tad above our estimate of 40.1%.
Bottom-line weighed down by higher tax provision
JAL reported PBT of `290cr, which surpassed our estimates mainly on account of
robust top-line growth during the quarter. However, recurring earnings for the
quarter de-grew 16.3% mainly on account of the plunge in margins and higher tax
provision at 60.1% and was in line with our estimates.
Outlook and Valuation
We expect JAL to become one of the fastest growing conglomerates and post topline
and bottom-line CAGR of 33.9% and 31.5% respectively, over FY010-12. We
have valued JAL’s cement business at 6.5x EV/EBITDA (`62.7/share) and
construction division at FY2012E target EV/EBITDA multiple of 8.5x (`78.5/share).
We have valued its power and real estate businesses on market cap basis (giving
20% holding company discount) contributing `81.8/share to our target price. The
treasury shares (`11.1/share) have been valued at the current market price,
whereas net debt is accounted for on a per share basis in our valuation at `65.1.
We maintain a Buy on the stock with an SOTP Target Price of `169, implying an
upside of 35% from current levels.
Investment Arguments
On schedule cement capacity expansion instills confidence: JAL is on its way to
become one of the leading players in the cement space following capacity
expansion from 9.0mtpa in FY2008 to 29.3mtpa in FY2012E. The capacity
expansion is on track and in line with management guidance. Cement contributed
44%, 35% and 38% to standalone top-line in FY2008, FY2009 and FY2010
respectively, and is expected to contribute 39.8% and 41.0% in FY2011 and
FY2012, respectively. We believe that the cement capacity size that JAL proposes to
set up would enable it to have substantial bargaining power, result in operating
leverage benefits and catapult JAL into the league of cement majors.
Construction arm to log 33.2% CAGR over FY2010-12E: JAL is developing the
160km, 6-lane (extendable to 8 lanes) access controlled Yamuna expressway
between Noida and Agra. The Yamuna Expressway (YE) project also involves real
estate development to the tune of 530mn.sq.ft. The cost of YE is `9,739cr and has
a concession period of 36 years. Financial closure of the YE is done with 69% of
the TPC already put in (equity component of `1,250cr, IPO proceeds of `1,500cr
and debt of `4,477cr). Moreover, Jaypee Infratech is in possession of 96.5% of the
land required for construction of the highway, and work is on schedule. Thus, JAL’s
strong execution track record backed by in-place funding and acquired land
renders strong visibility to its construction arm.
Diversified play: JAL is a unique play on the ongoing infrastructure theme with a
bouquet of offerings in construction, cement, power and real-estate. Moreover, not
only does the company have a diversified set of offerings, but also enjoys scale
benefits in each of them. We believe that the company stands to benefit as the
infrastructure theme pans out going ahead.
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