Angel Broking: Buy JP Associates - Target Rs. 131. 3QFY2011 Update

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JP Associates – 3QFY2011 Result Update

Angel Broking maintains a Buy on JP Associates with a Target Price of Rs. 131.

For 3QFY2011, Jaiprakash Associates (JAL) reported disappointing numbers

(standalone) led by poor performance by the construction and cement segments,

which was partly compensated by the good performance of the real estate

segment. We have revised downwards our FY2011 and FY2012 estimates to

factor in lower construction revenues, and depressed sales and realisations in the

cement segment. We remain positive on the stock and maintain a Buy.

Result below expectations: On the top-line front, the company’s revenue declined

by 0.5% yoy to `2,949cr (`2,964cr) v/s our estimate of `3,616cr primarily due to

the staggering 23% yoy fall in construction revenues. EBITDA margins stood at

28.7% v/s our expectation of 26.6% on the back of the substantial increase in the

margins of the real estate business, which squared off the poor performance of

the cement segment. Interest and depreciation costs were in line with our

estimates. Bottom-line at `233cr was below our estimate of `327.7cr due to the

poor performance in the construction segment, fall in cement margins and sales

along with higher interest cost.

Outlook and Valuation: We expect JAL to emerge as one of the fastest growing

conglomerates and post top-line and bottom-line CAGR of 29% and 27%

respectively, over FY010-12. We have valued the cement business at 7x FY2012E

EV/EBITDA (`61.6/share) and construction division at 8.5x FY2012E EV/EBITDA

(`57.2/share). The power and real estate businesses have been valued on market

cap basis (giving 15% holding company discount) contributing `65.5/share to our

target price. The treasury shares (`7.8/share) have been valued at the current

market price, whereas net debt is accounted for on a per share basis in our

valuation at `61.2. We maintain a Buy on the stock, with a SOTP-based Target

Price of `131, implying an upside of ~57% from current levels.

Segment-wise performance

Cement division

JAL’s cement division reported revenue growth of 30.5% yoy to `1,237cr (`948cr),

~5% above our estimate of `1,180cr. The divisional EBIT margin saw a huge drop

of 1,344bp to 11.5% (24.9%), which was mainly on account of higher depreciation

on capacity commissioned, higher input cost and decline in realisations

(`3,413/tonne for the quarter). JAL currently has an installed cement capacity of

~24MTPA and 9MFY2011 dispatch volume stood at ~11mtpa. We expect the

company to achieve dispatch volume of 15.2mtpa and top-line of `5,466cr 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 19.3mtpa and realisation

of `4,071/tonne (gross) resulting in top-line of `7,100cr, a yoy jump of 30%.

Construction division

The construction division registered de-growth of 22.7% yoy in revenues to

`1,264cr (`1,635cr) as against our expectation of `2,136cr. As per management

this was mainly due to the agitation at the Yamuna Expressway. Divisional EBIT

margin recorded a drop of ~350bp and came in at 21.4% (24.9%) as against our

estimate of 25%. For FY2011 and FY2012, we are penciling in top-line of

`5,769cr and `7,218cr, respectively. On the operating front, we are factoring in

EBIT margin of 14.5% and 17% for FY2011 and FY2012, respectively.

Real estate division

The real estate division reported better-than-expected performance with 23.1% yoy

revenue growth to `426cr (`346cr) as against our expectation of `250cr. The

divisional EBIT margin saw a phenomenal jump of 2,660bp and came in at 69.1%

(42.5%), on account of sales of high-margin plots and handing possession of

certain apartments.

Bottom-line disappoints

JAL reported poor performance on the bottom-line front, which came in at `233cr

against our estimate of `327.7cr. The slippage in bottom-line was owing to the

following: a) lower traction in construction revenue, b) fall in cement margins and

realisations, c) higher interest costs which increased by 22% on yoy basis to

`33.8cr (`27.6cr).

Revision in estimates

We are revising our estimates downwards for FY2011 and FY2012 given the

lower-than-expected by this quarter. We have pruned our estimates to factor in

poor performance in construction segment, lower realisations and sales in the

cement business and strong performance by the real estate segment.

Outlook and Valuation

We expect JAL to emerge as one of the fastest growing conglomerates and post

top-line and bottom-line CAGR of 29% and 27% respectively, over FY010-12. We

have valued the cement business at 7x FY2012E EV/EBITDA (`61.6/share) and

construction division at 8.5x FY2012E EV/EBITDA (`57.2/share). The power and

real estate businesses have been valued on market cap basis (giving 15% holding

company discount) contributing `65.5/share to our target price. The treasury

shares (`7.8/share) have been valued at the current market price, whereas net

debt is accounted for on a per share basis in our valuation at `61.2. We maintain

a Buy on the stock, with a SOTP-based Target Price of `131, implying an upside of

~57% from current levels.