Upgrade to BUY:Jaiprakash Associates Cement ; E&C disappoints – Emkay

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Jaiprakash Associates

Cement ; E&C disappoints – Downgrade earnings

BUY

CMP: Rs 84                                       Target Price: Rs 110

---

n     APAT at Rs 2.3bn (-26% yoy) sharply below estimates (Rs 2.8bn) led by lower Cement & Construction rev. Topline +0.5% yoy (Rs28.9 bn vs est-Rs33.9bn), EBITDA declines 1% 

n     Execution issues drag construction revenues down -22.7%, flat realisations restricts cement revenues growth to 30%. Real estate revenues up 23.1% – surprises positively

n     Increasing cost pressures drag cement EBIT down by ~40% yoy- Slower execution & 350 bps decline in EBIT margins lead to 33% decline in construction EBIT. RE EBIT doubles  

n     Downgrade earnings by -19.1%/-12.9% for FY11E/FY12E.  Valuations at and 7.3X FY12 EV/EBITDA looks attractive post sharp stock price decline. Upgrade to BUY. Target Rs110. 

Flat topline impacted by execution issues in construction & flattish cement realization

JPA reported a lower than expected Q3FY11 performance with a meager 0.5% yoy

revenue growth to Rs 28.9bn (our exp – Rs 33.9bn). The quarter saw significantly lower

than expected construction booking due to obstruction of work at Yamuna Expressway.

Also cement revenues growth was restricted to 30.5% as cement realisations stood flat

at Rs3411/t, significantly lower than estimates of Rs3628/t. Real estate continue to

surprise positively with a topline growth of 23% yoy to Rs 4.25bn

EBIDTA down 1.1% yoy dragged by lower cement & construction margins

Overall EBIDTA at Rs8.25 bn declined 1.1% as 100% jump in real estate EBIT was

negated by sharp 39.8% and 33.4% decline in Cement & Construction EBIT. With

slower execution in key projects like Yamuna Expressway, Construction segment

registered a 346 bps yoy decline in EBIT margins to 21.4%. With cement realisation

remaining flat yoy, increasing coal & fly ash costs dragged cement EBIT margins to

11.5%, registering a sharp decline of 1343 bps yoy. Real estate EBIT doubled yoy to Rs

2.9 bn with EBIT margins of 39.1% improving by 2660 bps yoy.

APAT decline of -26% yoy-sharply below estimates

With 22.4% jump in interest outgo (~Rs175 bn of net debts) & 39% jump in depreciation

charge on account of cement capacity addition APAT for the quarter at Rs2.32 bn

declined 26.1% yoy, sharply below our estimates of Rs2.81 bn.



Segmental Performance

Cement volume up 29.8% yoy – realisation up 0.6% yoy

Cement revenues at Rs12.37 bn grew by 30.5% yoy driven by 29.8% volume growth (3.63

mt) while cement realisation remained flat at Rs3411/t. We would like to highlight that JPA

cement realisation declined 3.3% as cement prices remained subdued in JPA key Central &

Northern markets, on account of subdued cement offtake. Volumes grew as JPA

commissioned new capacities and ramped up utilization at recently commissioned units.

Segment’s performance was severely impacted by lower than expected volumes, flat

cement realization along with increasing cost pressures particularly Coal & fly ash. The

segment’s EBIT/ton stood at Rs392/t, declining by 53.6% yoy and 28.7% qoq. EBIT

margins also fell 1343 bps yoy & 409 bps qoq to 11.5%.



Construction revenues down 22.7% dragging the Q3FY11 performance

The quarter saw construction segment posting a decline of 22.7%yoy to Rs12.4 bn (our

estimates Rs18.07bn). We would like highlight that the segment’s performance was

impacted by obstruction of work at Yamuna Expressway. However the EBIT margins flared

in line with expectation and witnessed a correction of 346 bps yoy to 21.4%. Construction

EBIT stood at Rs 2.71bn vs our expectation (Rs 3.4bn) due to lower than expected

execution.

Realty revenues continue to surprise positively

Realty segment was a big surprise as the revenues realty segment delivering a whopping

23% yoy growth in Real estate revenues and 100% growth in EBIT to Rs 2.94 bn.

Downgrade earnings by -19.1%/-12.9% for FY11E/FY12E- cut target to Rs110
On account of disappointing Q3FY11 numbers by both cement & construction segment we
are downgrading our FY11E/12E earnings by 19.1%/12.9%. With downgrade in earnings
we lower our target price on JPA to Rs110 (Earlier Rs150). We continue to value JPA’s
cement business at EV/t on USD 100/t for its FY12 cement capacity. With downgrade in
EBIDTA of construction segment we have also lowered our target EV/EBIDTA multiple from
7.0x to 6.5x EV/EBITDA due to declining growth visibility. The lowering of price target are
also driven by significant correction in market price for JPA’s listed subsidiaries namely
Jaiprakash Power Ventures & Jaypee Infratech.

Sharp stock price correction makes valuation attractive – Upgrade to BUY
Reflecting the disappointing earnings performance and execution issues at key projects like
Yamuna expressway, JPA stock has significantly underperformed broader indices and has
corrected ~30% over last 3 months. However with earnings set to recover in FY12E (FY12E
net profit growth of 29%) we find valuation at 7.3X EBIDTA attractive. We upgrade the stock
from ACCUMULATE to BUY.