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Jaiprakash Associates
Below estimates led by poor cement business performance; FY12 consolidated earnings
downgraded 13.7%
Key highlights
• JPA reported Q3FY11 PAT at Rs2.3bn (-26% yoy), below estimates of Rs2.9bn, as better-than-expected performance of
the real estate division was offset by a sharp deterioration in cement business profitability.
• Revenues at Rs28.9bn (+1% yoy) were below estimates, led by lower cement as well as construction revenues. Despite
a robust 32% yoy jump in volumes to 3.63mn tons, cement revenues trailed estimates due to sharply lower-thanexpected
growth in realizations (-Rs117/tonne qoq). After a strong 53% growth in H1FY11, revenues in the
construction division fell by 23% yoy to Rs12.6bn, led by quarterly variations in revenue recognition, as also due to
the fact that Karcham Wangtoo and Yamuna Expressway projects are in final stages of completion. Real estate
revenues increased by 23% yoy to Rs4.3bn, led by strong sales and execution of projects at Jaypee Greens Noida and
Greater Noida.
• Construction EBIT margins came in ahead of estimates at 21.4%, partly led by a pick-up in execution at the Srisailam
tunneling site in the previous quarter. Cement profitability fell sharply to an EBITDA of Rs765/ton (down 32% yoy
and Rs123/tonne qoq) on the back of the lower realizations. Real estate EBIT margins surprised positively, jumping to
69% during the quarter, on the back of a favorable mix of projects crossing the profit-booking threshold.
• Led mainly by the lower cement revenues and margins, total EBITDA fell 1% yoy to Rs7.9bn, below our estimate of
Rs8.7bn. However, EBITDA margins at 27.4% came in ahead of estimates (25.3%) on the back of the better-thanexpected
construction and real estate profitability.
• Interest expenses increased by 22% yoy to Rs3.4bn (estimates of Rs3.4bn), led by net debt of Rs173bn on the books as
of 31 December 2010. Net debt increased from Rs140bn as of 31 March 2010 due to capex on the large cement
expansions as well as equipment purchases for the construction division.
• Reported earnings include a prior-period tax provision of Rs9m, which we have treated as an extraordinary item. On
a comparable basis, reported PAT in Q3FY10 was Rs1bn.
Segmental performance
Cement
Cement revenues grew by 31% yoy to Rs12.4bn, led mainly by a 32% yoy jump in volumes to 3.63mn tonnes, as
realizations fell by 1% yoy. On a sequential basis, realizations declined by Rs117/tonne on the back of weak cement
prices across JPA’s key markets in the northern and central regions.
Led by the fall in realizations, EBITDA fell by 32% yoy to Rs765/tonne, sharply below estimates. As a result, total EBITDA
declined by 11% yoy to Rs2.8bn.
Construction
Construction revenues fell by 23% yoy to Rs12.6bn as the Yamuna Expressway and Karcham Wangtoo hydropower
projects are now in final stages of completion.
EBIT margins, although better than estimated, fell by 370bp yoy to 21.4%, led by recommencement of work on the Srisailam
tunneling project in the previous quarter. Therefore, EBIT fell by 34% yoy to Rs2.7bn.
Real estate
Revenues increased by 23% yoy to Rs4.3bn on strong sales and project completion at the company’s Jaypee Greens property
in Greater Noida and Noida. This led to a 100% jump in EBIT to Rs2.9bn.
Valuations & View
We have adjusted our standalone earnings estimates for JPA to account for the sharply lower cement business
profitability. We also factor in higher interest costs going forward (increase in debt levels and increased charge to P&L on
commissioning of cement capacities) as also a greater decline in construction revenues than earlier estimated. Therefore,
we have downgraded our standalone earnings by 4% for FY11E and by 18% for FY12E. Considering recent changes to
our earnings estimates for JPVL (6.4% upgrade in FY11E earnings; no change for FY12E) and the changes to Jaypee
Infratech’s estimates by our real estate analyst (25% upgrade to FY11E earnings; 8% downgrade to FY12E earnings), our
consolidated earnings estimates stand upgraded by 17% for FY11 and downgraded by 14% for FY12. Our revised
estimates are Rs8.5/share for FY11 and Rs11.6/share for FY12.
JPA’s cement earnings are likely to be under pressure from an overall weakness in pricing due to an imminent
oversupply in the domestic market. However, led by strong volumes from large capacity additions, we expect JPA’s
cement EBIT to register a 20% CAGR over FY11-12E. Construction earnings are also expected to decline in the near term
due to a slowdown in revenue growth for an intermittent period between completion of existing large projects and
commencement of profit recognition from new orders. However, with robust earnings growth in JPVL and Jaypee
Infratech, we expect JPA’s consolidated earnings to grow at 33% CAGR over FY10-12E. While high gearing, especially in the current rising interest rate scenario, remains a concern, we believe that with the Yamuna Expressway (Jaypee
Infratech) project now independently funded and possibilities of separately raising funds in JPVL to finance the large
power development pipeline, the pressure on JPA’s balance sheet is likely to ease over the next 12-18 months. We believe
the commissioning of Karcham Wangtoo and Yamuna Expressway would be key triggers for the stock in the near term.
Hence, we find JPA attractively valued at 7.5x FY12E earnings and 9.5x FY12E EV/EBITDA. We maintain our
Outperformer rating with a revised 12-month target price of Rs164/share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jaiprakash Associates
Below estimates led by poor cement business performance; FY12 consolidated earnings
downgraded 13.7%
Key highlights
• JPA reported Q3FY11 PAT at Rs2.3bn (-26% yoy), below estimates of Rs2.9bn, as better-than-expected performance of
the real estate division was offset by a sharp deterioration in cement business profitability.
• Revenues at Rs28.9bn (+1% yoy) were below estimates, led by lower cement as well as construction revenues. Despite
a robust 32% yoy jump in volumes to 3.63mn tons, cement revenues trailed estimates due to sharply lower-thanexpected
growth in realizations (-Rs117/tonne qoq). After a strong 53% growth in H1FY11, revenues in the
construction division fell by 23% yoy to Rs12.6bn, led by quarterly variations in revenue recognition, as also due to
the fact that Karcham Wangtoo and Yamuna Expressway projects are in final stages of completion. Real estate
revenues increased by 23% yoy to Rs4.3bn, led by strong sales and execution of projects at Jaypee Greens Noida and
Greater Noida.
• Construction EBIT margins came in ahead of estimates at 21.4%, partly led by a pick-up in execution at the Srisailam
tunneling site in the previous quarter. Cement profitability fell sharply to an EBITDA of Rs765/ton (down 32% yoy
and Rs123/tonne qoq) on the back of the lower realizations. Real estate EBIT margins surprised positively, jumping to
69% during the quarter, on the back of a favorable mix of projects crossing the profit-booking threshold.
• Led mainly by the lower cement revenues and margins, total EBITDA fell 1% yoy to Rs7.9bn, below our estimate of
Rs8.7bn. However, EBITDA margins at 27.4% came in ahead of estimates (25.3%) on the back of the better-thanexpected
construction and real estate profitability.
• Interest expenses increased by 22% yoy to Rs3.4bn (estimates of Rs3.4bn), led by net debt of Rs173bn on the books as
of 31 December 2010. Net debt increased from Rs140bn as of 31 March 2010 due to capex on the large cement
expansions as well as equipment purchases for the construction division.
• Reported earnings include a prior-period tax provision of Rs9m, which we have treated as an extraordinary item. On
a comparable basis, reported PAT in Q3FY10 was Rs1bn.
Segmental performance
Cement
Cement revenues grew by 31% yoy to Rs12.4bn, led mainly by a 32% yoy jump in volumes to 3.63mn tonnes, as
realizations fell by 1% yoy. On a sequential basis, realizations declined by Rs117/tonne on the back of weak cement
prices across JPA’s key markets in the northern and central regions.
Led by the fall in realizations, EBITDA fell by 32% yoy to Rs765/tonne, sharply below estimates. As a result, total EBITDA
declined by 11% yoy to Rs2.8bn.
Construction
Construction revenues fell by 23% yoy to Rs12.6bn as the Yamuna Expressway and Karcham Wangtoo hydropower
projects are now in final stages of completion.
EBIT margins, although better than estimated, fell by 370bp yoy to 21.4%, led by recommencement of work on the Srisailam
tunneling project in the previous quarter. Therefore, EBIT fell by 34% yoy to Rs2.7bn.
Real estate
Revenues increased by 23% yoy to Rs4.3bn on strong sales and project completion at the company’s Jaypee Greens property
in Greater Noida and Noida. This led to a 100% jump in EBIT to Rs2.9bn.
Valuations & View
We have adjusted our standalone earnings estimates for JPA to account for the sharply lower cement business
profitability. We also factor in higher interest costs going forward (increase in debt levels and increased charge to P&L on
commissioning of cement capacities) as also a greater decline in construction revenues than earlier estimated. Therefore,
we have downgraded our standalone earnings by 4% for FY11E and by 18% for FY12E. Considering recent changes to
our earnings estimates for JPVL (6.4% upgrade in FY11E earnings; no change for FY12E) and the changes to Jaypee
Infratech’s estimates by our real estate analyst (25% upgrade to FY11E earnings; 8% downgrade to FY12E earnings), our
consolidated earnings estimates stand upgraded by 17% for FY11 and downgraded by 14% for FY12. Our revised
estimates are Rs8.5/share for FY11 and Rs11.6/share for FY12.
JPA’s cement earnings are likely to be under pressure from an overall weakness in pricing due to an imminent
oversupply in the domestic market. However, led by strong volumes from large capacity additions, we expect JPA’s
cement EBIT to register a 20% CAGR over FY11-12E. Construction earnings are also expected to decline in the near term
due to a slowdown in revenue growth for an intermittent period between completion of existing large projects and
commencement of profit recognition from new orders. However, with robust earnings growth in JPVL and Jaypee
Infratech, we expect JPA’s consolidated earnings to grow at 33% CAGR over FY10-12E. While high gearing, especially in the current rising interest rate scenario, remains a concern, we believe that with the Yamuna Expressway (Jaypee
Infratech) project now independently funded and possibilities of separately raising funds in JPVL to finance the large
power development pipeline, the pressure on JPA’s balance sheet is likely to ease over the next 12-18 months. We believe
the commissioning of Karcham Wangtoo and Yamuna Expressway would be key triggers for the stock in the near term.
Hence, we find JPA attractively valued at 7.5x FY12E earnings and 9.5x FY12E EV/EBITDA. We maintain our
Outperformer rating with a revised 12-month target price of Rs164/share.
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