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Jaypee Infratech (JYPE.BO; Neutral): Execution vs OCF yield
Investment view
We initiate coverage on Jaypee Infratech (JIL) with a Neutral rating and
a 12-month target price of Rs78.
In our view, the following key revenue drivers appear robust:
Large pre-sales. Has sold 31 mn sqft of residential real estate with
cumulative value of Rs96 bn over past six quarters. This provides good
visibility on residential revenue booking, which we estimate at Rs118
bn over FY10-FY13E. We like JIL’s volume-driven strategy, but it also
entails significant ramp-up in execution capability and we believe
delays could affect marketability of future residential launches.
Uncertainty over toll revenues. We expect FY13E to be first year of
normal operations for the expressway and we estimate it could
register a negative PBT of Rs7 bn.
Expressway completion to enhance value of two key parcels.
Jaypee has two key land parcels around 10-km from start of the
Yamuna Expressway (Exhibit 88). Completion of the expressway and
Formula One circuit at Jaypee Sports City (see Exhibit 88) would likely
enhance value of these land parcels. The UP government has planned
the Yamuna Expressway to aid development of the entire stretch,
besides cutting travelling time significantly between Delhi and Agra.
Low cost of land acquisition enhances competing ability. As per
the Yamuna Expressway Concession (for details, see company
background section), JIL’s acquisition cost for all land under the
Concession is equal to government’s acquisition cost plus a fixed
lease rental. JIL has acquired its land for construction of the
expressway and real estate development at an average cost of
approximately Rs2.3 mn/acre.
High Operating cashflow yield. We estimate high operating
cashflow yield of 13% for FY12E-FY13E. We believe high operating
cash flow yield will materialize if JIL can ensure timely execution of
pre-sold area.
Valuation
Our 12-m TP of Rs 78 is set at a 20% discount to FY12E RNAV of Rs97
on account of significant scale-up needed in execution and single
location concentration risk.
The stock is trading at FY12E P/B of 1.3X vs a sector average of 1.4X
and at FY2012E P/E of 5.8X vs a sector average of 11.1X.
We estimate Jaypee’s FY12E ROE at 25% vs the sector average of 11%.
Key risks to our thesis
Downside: (1) Reinvestment risk, slower-than-expected execution,
political risk.
Upside: Faster than expected completion of Yamuna expressway,
better-than-expected residential pricing.
Robust pre-sales will drive revenue growth
We discuss various revenue drivers as below:
Real estate (Noida land parcel). JIL is following a volume-driven strategy as it has
started monetization of the first land parcel. As of December 2010, JIL has sold total 31 mn
sqft of real estate from the Noida land parcel, valued at Rs96 bn. This provides good
visibility on residential revenue booking, which we estimate at Rs118 bn over FY10-FY13E.
Real estate (other land parcels). JIL intends to launch an integrated township at Agra in
mid-CY11 followed by launches at Greater Noida. We expect large proportion of sales from
other land parcels to be driven by plotted development.
Toll revenues. We model road projects to have first stable year of operations in FY2013E
earning revenues of Rs2.2 bn. We assume annual traffic growth of 6% for the project from
FY12E.
Clear title land parcels acquired at reasonable cost
JIL has acquired land for construction of the Yamuna Expressway and real estate
development at an average cost of approximately Rs2.3 mn/acre. Cost of land acquisition is
competitive since it has been acquired and then leased to JIL by Yamuna Expressway
Authority (YEA). YEA acquired this land under Land Acquisition Act, 1894, and prior to
development of the road and leased out to JIL to partly subsidize cost of expressway. JIL
has acquired all of its land from the YEA with land use permissions for real estate
development. As a result of this direct acquisition of land from the YEA, JIL does not incur
the added costs associated with an auction process or with the acquisition of agricultural
land.
Government of Uttar Pradesh (GoU) has planned Yamuna Expressway to aid development
of the entire stretch, besides cutting travelling time significantly between Delhi and Agra.
For planning the development of the entire region, GoU has constituted Yamuna
Expressway Industrial Development Authority (YEA) as the nodal development agency.
Exhibit 88 shows planned development of the entire region.
The first land parcel is potentially attractive since it is close to the upmarket South Delhi
and is among the largest upcoming townships near Delhi. Exhibit 89 shows the
expressway alignment.
Lower land cost gives JIL pricing flexibility
JIL plans to keep pricing competitive given the large scale of planned development.
Furthermore, developments are designed as integrated townships with a wide range of
planned educational, recreational, commercial and retail facilities, so that they would
appeal to a diverse mix of potential residents. We believe this volume-driven strategy
would enable JIL to reduce the debt it has availed for construction of the expressway.
Keeping pricing competitive has helped JIL sell close to 31 mn sqft over the past eight
quarters. Thus, value sold by JIL has been third largest among our coverage universe after
DLF and Unitech.
Contiguous land reserves provide JIL with significant land use flexibility. Around 885
acres of JIL’s potential real estate for development is located in Noida and an additional
2,470 acres is located in the NCR. Furthermore, JIL has the broad flexibility to develop
commercial, amusement, industrial, institutional and residential real estate and is entitled
to sell or sub-lease developed or undeveloped properties to third parties or affiliates. Thus,
we think JIL is in a position to plan its developments depending on requirements and
phase it adequately to maximize the revenue potential of each land parcel.
Management has stated that they intend to maintain an annual sale value of Rs50 bn.
While currently it comprises mostly residential real estate from Noida parcel, it will likely
become more broad based will sales across other land parcels and contribution from
commercial as well.
Formula 1 circuit to enhance value of two land parcels
The first Formula 1 race in India is planned in October 2011 at Jaypee Sports City. JIL has
two land parcels (2,470 acres) in the vicinity of Formula 1 Circuit. We believe that
development of Yamuna Expressway and start of racing circuit will improvement prospects
of the entire region and enhance value of the two land parcels.
Residential launch by YEA has seen good response. YEA had come up with a plotted
development scheme in mid-CY2009 in close vicinity to the two land parcels of JIL.
Besides the proposed Formula 1 racing track, this area is also close to the proposed Night
Safari, University and Eastern Peripheral Expressway. The scheme was the first large
residential draw of plots scheme with 8,350 plots put up for the draw initially with final
allotment of 21,000 plots. The plots were available in installments over eight years at
Rs4750/ sqm (Rs437/sqft).
The scheme attracted approximately 43,000 applicants for its 21,000 plots and the draw for
the scheme closed on Nov 17, 2009. Based on average plot size of 527 sqm (from the 8,350
plots initially offered), the approximate demand works out to be 22.6 mn sqm (243.9 mn sq.
ft), in our view.
Property prices have since then increased significantly in line with development progress
of the region. Exhibit 92 gives comparative rates of plotted development in the region.
Company background
JIL is part of the Jaypee Group and was incorporated in April 2007 as a special purpose
company to implement the Concession of building the Yamuna Expressway. JIL holds the
Concession from the Yamuna Expressway Authority (YEA) to develop, operate and
maintain the Yamuna Expressway in the state of Uttar Pradesh, connecting Noida and Agra.
The Concession also provides for the right to develop approximately 6,175 acres of land
along the Yamuna Expressway at five locations for residential, commercial, amusement,
industrial and institutional purposes. JIL’s business model consists of earning revenues
from traffic and related facilities on the expressway during the 36-year Concession period
and development of associated real estate pursuant to the Concession.
Key details of the expressway. It will be a165 km expressway along the Yamuna river
connecting Greater Noida and Agra. First 40 km are located in Gautam Budh Nagar district
passing Noida, Dhankaur, Mirzapur and Jewar, followed by 20 km in Aligarh, passing
Tappal. The following 90 km are planned to be in Mathura followed by approximately 15
km in Agra district, with the expressway ending near Etmadpur, a village in District Agra.
We provide key details of the Concession agreement below:
Duration of the Concession. The Concession follows a build-operate-transfer model and
JIL will have the right to earn toll revenue for a period of 36 years commencing upon the
award of a certificate of completion for the expressway. The expressway will be
transferred to the YEA at the end of the Concession period without any payment to JIL.
Terms of land lease. The Concession Agreement provides that the YEA will lease to
JIL all required land for the Yamuna Expressway free from all encumbrances and that
JIL will pay the YEA an amount equal to its cost of acquiring all land for the project
plus a minimal lease rental of Rs100 per hectare per annum for the Concession period.
Selection of land locations. The specific tracts of land to be leased are to be selected
at JIL’s request, subject to the ability to achieve a minimum floor area ratio (FAR) of 1.5.
To the extent local regulations do not permit for a FAR of at least 1.5, the YEA has
agreed to make suitable adjustment to the land to be transferred under the Concession
Agreement. Lease period for various land parcels is 90 years.
Construction period. JIL commenced construction of the expressway in January 2008
and, while the Concession establishes a deadline for completion by April 2013, JIL
expects to complete construction by 2011.
Levy of tolls. Users of the expressway will be required to pay tolls, the amount of
which is regulated and may be modified from time to time at JIL’s sole discretion
subject to applicable law and may not exceed the rates notified by the Government of
UP. JIL plans to implement an “access-controlled” approach to toll collection, which
means that users would pay tolls to enter the expressway as well as at designated
points along the expressway.
Number of lanes. The expressway is designed to accommodate three lanes of traffic
in each direction, with the potential to expand to four lanes in each direction.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jaypee Infratech (JYPE.BO; Neutral): Execution vs OCF yield
Investment view
We initiate coverage on Jaypee Infratech (JIL) with a Neutral rating and
a 12-month target price of Rs78.
In our view, the following key revenue drivers appear robust:
Large pre-sales. Has sold 31 mn sqft of residential real estate with
cumulative value of Rs96 bn over past six quarters. This provides good
visibility on residential revenue booking, which we estimate at Rs118
bn over FY10-FY13E. We like JIL’s volume-driven strategy, but it also
entails significant ramp-up in execution capability and we believe
delays could affect marketability of future residential launches.
Uncertainty over toll revenues. We expect FY13E to be first year of
normal operations for the expressway and we estimate it could
register a negative PBT of Rs7 bn.
Expressway completion to enhance value of two key parcels.
Jaypee has two key land parcels around 10-km from start of the
Yamuna Expressway (Exhibit 88). Completion of the expressway and
Formula One circuit at Jaypee Sports City (see Exhibit 88) would likely
enhance value of these land parcels. The UP government has planned
the Yamuna Expressway to aid development of the entire stretch,
besides cutting travelling time significantly between Delhi and Agra.
Low cost of land acquisition enhances competing ability. As per
the Yamuna Expressway Concession (for details, see company
background section), JIL’s acquisition cost for all land under the
Concession is equal to government’s acquisition cost plus a fixed
lease rental. JIL has acquired its land for construction of the
expressway and real estate development at an average cost of
approximately Rs2.3 mn/acre.
High Operating cashflow yield. We estimate high operating
cashflow yield of 13% for FY12E-FY13E. We believe high operating
cash flow yield will materialize if JIL can ensure timely execution of
pre-sold area.
Valuation
Our 12-m TP of Rs 78 is set at a 20% discount to FY12E RNAV of Rs97
on account of significant scale-up needed in execution and single
location concentration risk.
The stock is trading at FY12E P/B of 1.3X vs a sector average of 1.4X
and at FY2012E P/E of 5.8X vs a sector average of 11.1X.
We estimate Jaypee’s FY12E ROE at 25% vs the sector average of 11%.
Key risks to our thesis
Downside: (1) Reinvestment risk, slower-than-expected execution,
political risk.
Upside: Faster than expected completion of Yamuna expressway,
better-than-expected residential pricing.
Robust pre-sales will drive revenue growth
We discuss various revenue drivers as below:
Real estate (Noida land parcel). JIL is following a volume-driven strategy as it has
started monetization of the first land parcel. As of December 2010, JIL has sold total 31 mn
sqft of real estate from the Noida land parcel, valued at Rs96 bn. This provides good
visibility on residential revenue booking, which we estimate at Rs118 bn over FY10-FY13E.
Real estate (other land parcels). JIL intends to launch an integrated township at Agra in
mid-CY11 followed by launches at Greater Noida. We expect large proportion of sales from
other land parcels to be driven by plotted development.
Toll revenues. We model road projects to have first stable year of operations in FY2013E
earning revenues of Rs2.2 bn. We assume annual traffic growth of 6% for the project from
FY12E.
Clear title land parcels acquired at reasonable cost
JIL has acquired land for construction of the Yamuna Expressway and real estate
development at an average cost of approximately Rs2.3 mn/acre. Cost of land acquisition is
competitive since it has been acquired and then leased to JIL by Yamuna Expressway
Authority (YEA). YEA acquired this land under Land Acquisition Act, 1894, and prior to
development of the road and leased out to JIL to partly subsidize cost of expressway. JIL
has acquired all of its land from the YEA with land use permissions for real estate
development. As a result of this direct acquisition of land from the YEA, JIL does not incur
the added costs associated with an auction process or with the acquisition of agricultural
land.
Government of Uttar Pradesh (GoU) has planned Yamuna Expressway to aid development
of the entire stretch, besides cutting travelling time significantly between Delhi and Agra.
For planning the development of the entire region, GoU has constituted Yamuna
Expressway Industrial Development Authority (YEA) as the nodal development agency.
Exhibit 88 shows planned development of the entire region.
The first land parcel is potentially attractive since it is close to the upmarket South Delhi
and is among the largest upcoming townships near Delhi. Exhibit 89 shows the
expressway alignment.
Lower land cost gives JIL pricing flexibility
JIL plans to keep pricing competitive given the large scale of planned development.
Furthermore, developments are designed as integrated townships with a wide range of
planned educational, recreational, commercial and retail facilities, so that they would
appeal to a diverse mix of potential residents. We believe this volume-driven strategy
would enable JIL to reduce the debt it has availed for construction of the expressway.
Keeping pricing competitive has helped JIL sell close to 31 mn sqft over the past eight
quarters. Thus, value sold by JIL has been third largest among our coverage universe after
DLF and Unitech.
Contiguous land reserves provide JIL with significant land use flexibility. Around 885
acres of JIL’s potential real estate for development is located in Noida and an additional
2,470 acres is located in the NCR. Furthermore, JIL has the broad flexibility to develop
commercial, amusement, industrial, institutional and residential real estate and is entitled
to sell or sub-lease developed or undeveloped properties to third parties or affiliates. Thus,
we think JIL is in a position to plan its developments depending on requirements and
phase it adequately to maximize the revenue potential of each land parcel.
Management has stated that they intend to maintain an annual sale value of Rs50 bn.
While currently it comprises mostly residential real estate from Noida parcel, it will likely
become more broad based will sales across other land parcels and contribution from
commercial as well.
Formula 1 circuit to enhance value of two land parcels
The first Formula 1 race in India is planned in October 2011 at Jaypee Sports City. JIL has
two land parcels (2,470 acres) in the vicinity of Formula 1 Circuit. We believe that
development of Yamuna Expressway and start of racing circuit will improvement prospects
of the entire region and enhance value of the two land parcels.
Residential launch by YEA has seen good response. YEA had come up with a plotted
development scheme in mid-CY2009 in close vicinity to the two land parcels of JIL.
Besides the proposed Formula 1 racing track, this area is also close to the proposed Night
Safari, University and Eastern Peripheral Expressway. The scheme was the first large
residential draw of plots scheme with 8,350 plots put up for the draw initially with final
allotment of 21,000 plots. The plots were available in installments over eight years at
Rs4750/ sqm (Rs437/sqft).
The scheme attracted approximately 43,000 applicants for its 21,000 plots and the draw for
the scheme closed on Nov 17, 2009. Based on average plot size of 527 sqm (from the 8,350
plots initially offered), the approximate demand works out to be 22.6 mn sqm (243.9 mn sq.
ft), in our view.
Property prices have since then increased significantly in line with development progress
of the region. Exhibit 92 gives comparative rates of plotted development in the region.
Company background
JIL is part of the Jaypee Group and was incorporated in April 2007 as a special purpose
company to implement the Concession of building the Yamuna Expressway. JIL holds the
Concession from the Yamuna Expressway Authority (YEA) to develop, operate and
maintain the Yamuna Expressway in the state of Uttar Pradesh, connecting Noida and Agra.
The Concession also provides for the right to develop approximately 6,175 acres of land
along the Yamuna Expressway at five locations for residential, commercial, amusement,
industrial and institutional purposes. JIL’s business model consists of earning revenues
from traffic and related facilities on the expressway during the 36-year Concession period
and development of associated real estate pursuant to the Concession.
Key details of the expressway. It will be a165 km expressway along the Yamuna river
connecting Greater Noida and Agra. First 40 km are located in Gautam Budh Nagar district
passing Noida, Dhankaur, Mirzapur and Jewar, followed by 20 km in Aligarh, passing
Tappal. The following 90 km are planned to be in Mathura followed by approximately 15
km in Agra district, with the expressway ending near Etmadpur, a village in District Agra.
We provide key details of the Concession agreement below:
Duration of the Concession. The Concession follows a build-operate-transfer model and
JIL will have the right to earn toll revenue for a period of 36 years commencing upon the
award of a certificate of completion for the expressway. The expressway will be
transferred to the YEA at the end of the Concession period without any payment to JIL.
Terms of land lease. The Concession Agreement provides that the YEA will lease to
JIL all required land for the Yamuna Expressway free from all encumbrances and that
JIL will pay the YEA an amount equal to its cost of acquiring all land for the project
plus a minimal lease rental of Rs100 per hectare per annum for the Concession period.
Selection of land locations. The specific tracts of land to be leased are to be selected
at JIL’s request, subject to the ability to achieve a minimum floor area ratio (FAR) of 1.5.
To the extent local regulations do not permit for a FAR of at least 1.5, the YEA has
agreed to make suitable adjustment to the land to be transferred under the Concession
Agreement. Lease period for various land parcels is 90 years.
Construction period. JIL commenced construction of the expressway in January 2008
and, while the Concession establishes a deadline for completion by April 2013, JIL
expects to complete construction by 2011.
Levy of tolls. Users of the expressway will be required to pay tolls, the amount of
which is regulated and may be modified from time to time at JIL’s sole discretion
subject to applicable law and may not exceed the rates notified by the Government of
UP. JIL plans to implement an “access-controlled” approach to toll collection, which
means that users would pay tolls to enter the expressway as well as at designated
points along the expressway.
Number of lanes. The expressway is designed to accommodate three lanes of traffic
in each direction, with the potential to expand to four lanes in each direction.
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