Buy Jaypee Infratech - unique mix of annuity and development assets; Edelweiss

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Jaypee Infratech (JPIN IN, INR 61, Buy)

n  Large low-cost land bank, backed by a strong brand equity 

Jaypee Infratech (JPIN) is constructing the Yamuna Expressway (YE) project, a six-lane 165 km road connecting Noida to Agra, which we expect to become operational by Q1FY13. As compensation for constructing YE, JPIN has rights to collect toll for 36 years on YE and holds development rights on 6,175 acres of land (saleable area of 530 msf, of which, ~311 msf is located in the NCR), across five contiguous land parcels along YE, acquired at a low cost of INR 32-40/sf. The large low-cost land bank has enabled JPIN to compete effectively with its peers in Noida and is supported by the Jaypee Group’s established presence.

n  Flexible product/pricing strategy maximises cash flows

Unlike most developers who follow an inflexible pricing policy at the cost of volumes, JPIN has adopted a flexible pricing model that maximises volumes and cash flows. With unit sizes varying from 535-2,300 sf and ticket sizes in the range of INR 1.8-7.8 mn, the company has been able to achieve cumulative sales volumes of ~31.1 msf worth INR 92.3 bn as of December 2010 from the Noida land parcel , of which, the company has received ~INR 41.3 bn.  

n  Strong cash collections in FY11-13E; debt peaking in FY11

We expect JPIN to sell ~36 msf over FY11-13E for an aggregate transaction value of ~INR 111 bn. As a result, we expect JPIN to realise INR 49.9 bn of net cash flows (post-taxes) from real estate business over the same period. With YE nearing completion, JPIN is towards the end of its capex program and we expect JPIN’s debt to reduce with net D/E of 0.5x by FY13E against 2.0x in FY10.

n  Outlook and valuations: Cash flows key; initiate coverage with ‘BUY’

Our FY12E GAV of INR 82/share consists of INR 75/share for real estate business and FCFE of INR 7/share for YE and Noida-Greater Noida expressway. Adjusted for FY12E net debt in real estate, we arrive at a NAV of INR 80/share. Though dependence on Noida for cash flows and delay in completion of YE are key risks over FY12, we believe commissioning of YE and generation of real estate sales volumes from Greater Noida/Agra land parcels in FY12 will act as key triggers. At CMP of INR 61/share, the stock trades at 24% discount to our NAV of INR 80/share. We initiate coverage on the stock with ‘BUY/SP’ rating.