Jaiprakash Associates- Tough times continue: Macquarie Research,

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Jaiprakash Associates- Tough times continue
Event
 JPA declared its 3QFY11 results. Both revenues and earnings were below our
and the Street’s estimates.
 We revise our target price from Rs105 to Rs92 as we factor in a slight delay in
JP Power Ventures’ Karchana project and a higher discount to NAV in JP
Infratech due to the slowdown in the sales run rate and uncertainty around the
road tariff.

Impact
 Cash cows witness huge margin erosion: JPA’s cash cows – the
construction and cement businesses – witnessed a significant decline in
earnings due to slow progress on projects and realisations decline,
respectively.
 Cement business hurt by realisations decline: JPA’s cement
realisation declined steeply by 16% to Rs2,912/ton and EBIT fell by 61%
YoY to Rs335/ton. We have been highlighting that the significant
overcapacity in cement production in India would hit JPA’s earnings.
 Construction business hurt by slow progress on Yamuna
expressway: The construction business witnessed a 23% decline in
revenues due to the slow progress on the Yamuna expressway projects
due to agitation.
 Real estate sales save the day: Real estate sales at Rs4.26bn (up 23%
YoY) provided the earnings boost. EBIT from this segment contributed to
41% of the company’s overall EBIT (a record high).
 Concerns on core business persist: We believe that overcapacity in the
Indian cement industry along with JPA’s desperation to utilise its capacity of
33m tons by FY12 would put further pressure on cement realisations. The
construction business does not have a meaningful order book after the
completion of Karcham Wangtoo, Yamuna expressway and JP Sports city in
mid CY11.
 Valuation of key subsidiaries could have major downside: JP Power
Ventures has an equity shortfall of US$1bn which could delay its projects
under implementation. Similarly, JP Infratech’s (JPIN IN, Rs66, Neutral, TP:
Rs81, Covered by Unmesh Sharma) exposure to NCR could have downside
as the NCR market suffers from a slow down in real estate sales.
Earnings and target price revision
 We have cut our target price to Rs92 from Rs105 as we assign a higher
holding company discount to its subsidiaries’ valuation to factor in the
potential delay in the commissioning of the Karchana power plant of JP Power
Ventures and higher discount to NAV in JP Infratech.
Price catalyst
 12-month price target: Rs92.00 based on a Sum of Parts methodology.
 Catalyst: further fall in cement realisations and delay in subsidiaries’ projects
Action and recommendation
 Catalysts missing for next 12 months; retain Neutral: We believe that
unless there is a fundamental turnaround in JPA’s core businesses of cement
and construction, its earnings are likely to remain under pressure. Delay in
projects of subsidiaries would add further downside risks. Retain cautious
view on the stock with a revised target price of Rs92.


JP Infratech – higher downside to NAV warranted
 Expressway could have a higher negative value depending on toll policy adopted: Our
model currently builds in a toll rate in line with the Pune expressway highway, where the toll rates
are twice that of NHAI prescribed rates. The company had recently said that it may use NHAIbased toll rates. This could increase the negative value of the expressway further from Rs10bn
currently to Rs30bn.
 Sales run-rate has cooled off highlighting due to the oversupply situation in the NCR
region: Annual sales run-rate has cooled off with 9.8m sq ft sold in the 9MFY11 period v/s 18.2m
sqft sold in FY10. At this run-rate, the annual sales run rate would be 12-13m sq ft. Our real estate
analyst, Unmesh Sharma, believes that the NCR market (including Noida where JP Infratech is
present) would see a slow down in volumes in FY11 and FY12.
Reducing our target price to Rs92 from Rs105
 No change in valuation for cement and construction businesses: While we have not changed
our valuations for the cement and construction businesses presently, any further fall in cement
realisations and failure to bag meaningful construction orders would lead us to cut our valuation.
 Factoring in higher discount to NAV in JP Infratech: We increase our discount to NAV from
20% to 35% for JP Infratech as the sales volumes have slowed downed considerably. Uncertainty
around toll policy of the expressway also remains a major overhang on JPIN’s valuations.
 Factoring in delay in Karchana power project of JP Power Ventures: We have factored in a
delay in Karchana power project of JP Power Ventures due to the ongoing agitation around the
project.
 Valuing treasury shares at our target price rather than current market price: We now
value189.3m treasury shares at our target price rather than valuing them at the current market
price.