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Jaiprakash Associates Ltd. -----------------------------------------------Maintain OUTPERFORM
Merger of subsidiaries at JPVL marginally value decretive for JPA
● The board of directors of JPVL (JPA’s power subsidiary) has
approved the merger of its subsidiaries, JKHCL (developing 1GW
Karcham Wangtoo hydro power project) and BPSCL (1.5GW Bina
power project) with itself, effective from April 2010. The merger
would be subject to the approvals of shareholders, creditors & the
High Court, and is expected to take three-six months time.
● JPVL has announced the swap ratio of one share of JPVL to be
issued for every five shares of JKHCL and two shares of JPVL to
be issued for every thirteen shares of BPSCL, that would lead to
21% equity issuance at JPVL (Figure 1).
● We believe that while 14% treasury shares (Figure 2) at JPVL
would provide it with an option to raise equity especially given its
high gearing, it would also act as a stock overhang for JPVL.
JPVL board has also approved plans to raise equity of Rs35 bn.
● Swap ratio for JKHCL (valued at 0.9x FY11 P/B) is in favour of
JPVL versus JPA. We cut our price target for JPA to Rs140 (from
Rs146) to factor in lower value for its 43.1% stake in JKHCL
(Figure 3). JPA’s stake in JPVL would get diluted to 67.2%
Figure 1: Potential equity issuance at JPVL
JKHCL shares o/s (mn) 2,145
Swap ratio for JKHCL (x) 5.0
JPVL shares to be issued (mn) - A 429
BPSCL shares o/s (mn) 826
Swap ratio for BPSCL (x) 6.5
JPVL shares to be issued (mn) - B 127
JPVL shares outstanding pre-merger (mn) 2,096
JPVL shares to be issued for merger (mn) – A + B 556
JPVL shares outstanding post-merger (mn) 2,652
JPVL's equity issuance on post-merger capital (%) 21.0%
Source: Company data, Credit Suisse estimates
JPVL has announced the swap ratio of one share of JPVL to be
issued for every five shares of JKHCL and two shares of JPVL to be
issued for every thirteen shares of BPSCL, that would lead to 21%
equity issuance at JPVL (Figure 1).
Figure 2: Break-up of shares issuance and creation of treasury stock
JPVL's stake in JKHCL (%) 56.9%
Shares for JPVL's treasury from merger of JKHCL (mn) – A 244
JPA's stake in JKHCL (%) 43.1%
JPVL shares to be issued to JPA from merger of JKHCL (mn) – B 185
JPVL's stake in BPSCL (%) 100.0%
Shares for JPVL's treasury from merger of BPSCL (mn) – C 127
Total treasury shares for JPVL (mn) – A + C 371
% treasury shares at JPVL on post-merger capital 14.0%
Total shares to be issued to JPA (mn) – B 185
Source: Company data, Credit Suisse estimates
Of the total share issuance at JPVL (556 mn shares), the merger
would lead to the creation of 14% treasury stock at JPVL (371 mn
shares) and issue of 185 mn shares to JPA for its 43.1% stake in
JKHCL (Figure 2).
Figure 3: Impact on JPA value from unfavourable swap ratio for JKHCL
Value of JPVL shares at CMP to be issued to JPA for its 43.1% stake in JKHCL
(Rs mn)
7,660
Our estimated valuation of JPA's 43.1% stake in JKHCL (Rs mn) 22,723
Impact for JPA’s valuation from its unfavourable swap ratio at JKHCL (Rs/
share of JPA)
6
Source: Company data, Credit Suisse estimates
The swap ratio implies that JKHCL has been valued at 0.9x its FY11
P/B (based on CMP of JPVL), which we believe is in favour of JPVL
as compared to JPA. We cut our price target for JPA to Rs140 (from
Rs146) to factor in the lower value for its 43.1% stake in JKHCL
(Figure 3). JPA’s stake in JPVL would get diluted from 76.3% to
67.2% post the merger (Figure 4).
Figure 4: Summary of change in JPA’s shareholding in JPVL
JPA's ownership of JPVL shares pre-merger (mn) 1,598
JPA's stake in JPVL - pre-merger (%) 76.3%
Shares of JPVL to be received by JPA for its 43.1% stake in JKHCL (mn) 185
Total shares of JPVL to be owned by JPA post-merger (mn) 1,783
Total shares outstanding for JPVL post-merger (mn) 2,652
JPA's stake in JPVL - post-merger (%) 67.2%
Source: Company data, Credit Suisse estimates
Expect strong execution in CY11. Maintain OUTPERFORM
We expect JPA to witness strong execution during CY11 led by the
commissioning of large projects – 1 GW Karcham hydro power project
(Mar-June 2011), F1 race track (Nov 2011), Yamuna Expressway
(Nov 2011) and 0.5 GW Bina-I coal power project (Nov 2011). We
believe the recent sharp correction in the stock price provides a
buying opportunity. We maintain our OUTPERFORM rating on JPA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jaiprakash Associates Ltd. -----------------------------------------------Maintain OUTPERFORM
Merger of subsidiaries at JPVL marginally value decretive for JPA
● The board of directors of JPVL (JPA’s power subsidiary) has
approved the merger of its subsidiaries, JKHCL (developing 1GW
Karcham Wangtoo hydro power project) and BPSCL (1.5GW Bina
power project) with itself, effective from April 2010. The merger
would be subject to the approvals of shareholders, creditors & the
High Court, and is expected to take three-six months time.
● JPVL has announced the swap ratio of one share of JPVL to be
issued for every five shares of JKHCL and two shares of JPVL to
be issued for every thirteen shares of BPSCL, that would lead to
21% equity issuance at JPVL (Figure 1).
● We believe that while 14% treasury shares (Figure 2) at JPVL
would provide it with an option to raise equity especially given its
high gearing, it would also act as a stock overhang for JPVL.
JPVL board has also approved plans to raise equity of Rs35 bn.
● Swap ratio for JKHCL (valued at 0.9x FY11 P/B) is in favour of
JPVL versus JPA. We cut our price target for JPA to Rs140 (from
Rs146) to factor in lower value for its 43.1% stake in JKHCL
(Figure 3). JPA’s stake in JPVL would get diluted to 67.2%
Figure 1: Potential equity issuance at JPVL
JKHCL shares o/s (mn) 2,145
Swap ratio for JKHCL (x) 5.0
JPVL shares to be issued (mn) - A 429
BPSCL shares o/s (mn) 826
Swap ratio for BPSCL (x) 6.5
JPVL shares to be issued (mn) - B 127
JPVL shares outstanding pre-merger (mn) 2,096
JPVL shares to be issued for merger (mn) – A + B 556
JPVL shares outstanding post-merger (mn) 2,652
JPVL's equity issuance on post-merger capital (%) 21.0%
Source: Company data, Credit Suisse estimates
JPVL has announced the swap ratio of one share of JPVL to be
issued for every five shares of JKHCL and two shares of JPVL to be
issued for every thirteen shares of BPSCL, that would lead to 21%
equity issuance at JPVL (Figure 1).
Figure 2: Break-up of shares issuance and creation of treasury stock
JPVL's stake in JKHCL (%) 56.9%
Shares for JPVL's treasury from merger of JKHCL (mn) – A 244
JPA's stake in JKHCL (%) 43.1%
JPVL shares to be issued to JPA from merger of JKHCL (mn) – B 185
JPVL's stake in BPSCL (%) 100.0%
Shares for JPVL's treasury from merger of BPSCL (mn) – C 127
Total treasury shares for JPVL (mn) – A + C 371
% treasury shares at JPVL on post-merger capital 14.0%
Total shares to be issued to JPA (mn) – B 185
Source: Company data, Credit Suisse estimates
Of the total share issuance at JPVL (556 mn shares), the merger
would lead to the creation of 14% treasury stock at JPVL (371 mn
shares) and issue of 185 mn shares to JPA for its 43.1% stake in
JKHCL (Figure 2).
Figure 3: Impact on JPA value from unfavourable swap ratio for JKHCL
Value of JPVL shares at CMP to be issued to JPA for its 43.1% stake in JKHCL
(Rs mn)
7,660
Our estimated valuation of JPA's 43.1% stake in JKHCL (Rs mn) 22,723
Impact for JPA’s valuation from its unfavourable swap ratio at JKHCL (Rs/
share of JPA)
6
Source: Company data, Credit Suisse estimates
The swap ratio implies that JKHCL has been valued at 0.9x its FY11
P/B (based on CMP of JPVL), which we believe is in favour of JPVL
as compared to JPA. We cut our price target for JPA to Rs140 (from
Rs146) to factor in the lower value for its 43.1% stake in JKHCL
(Figure 3). JPA’s stake in JPVL would get diluted from 76.3% to
67.2% post the merger (Figure 4).
Figure 4: Summary of change in JPA’s shareholding in JPVL
JPA's ownership of JPVL shares pre-merger (mn) 1,598
JPA's stake in JPVL - pre-merger (%) 76.3%
Shares of JPVL to be received by JPA for its 43.1% stake in JKHCL (mn) 185
Total shares of JPVL to be owned by JPA post-merger (mn) 1,783
Total shares outstanding for JPVL post-merger (mn) 2,652
JPA's stake in JPVL - post-merger (%) 67.2%
Source: Company data, Credit Suisse estimates
Expect strong execution in CY11. Maintain OUTPERFORM
We expect JPA to witness strong execution during CY11 led by the
commissioning of large projects – 1 GW Karcham hydro power project
(Mar-June 2011), F1 race track (Nov 2011), Yamuna Expressway
(Nov 2011) and 0.5 GW Bina-I coal power project (Nov 2011). We
believe the recent sharp correction in the stock price provides a
buying opportunity. We maintain our OUTPERFORM rating on JPA.
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