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Jaiprakash Associates Ltd
Initiation
Neutral
JAIA.BO, JPA IN
Wait for the cement to set, initiate with Neutral
• Initiate coverage with Neutral, PT of Rs100. JPA is the flagship company of
the Jaypee group, with cement assets of 23mtpa, a captive hydropower
construction business, and real estate of ~690mn sft around Noida. It is also the
holding co. for the group’s listed IPP, Jaiprakash Power Ventures and listed
property developer Jaypee Infratech. JPA has successfully achieved size and
scale in each of its businesses: it is India’s 3rd largest cement producer, the
largest property developer in and around NCR, and the largest private
hydropower generator and hydropower construction company.
• Negative sentiment across real estate, power and cement over the past year
has led to underperformance. The stock looks to have found support, but
we see 2 broad overhangs which could limit a sustained rally in the shares over
the next few quarters: A) P/L and B/S related: As a result of capacity ramp-ups
in cement and power, higher debt could make earnings vulnerable to operational
and pricing risks and accelerate the need for new capital at JPVL, B) Sentiment
related: i) Even with strong real estate sales at Noida, sentiment remains
cautious towards developers and their stocks are trading at discounts to NAV,
ii) Despite efforts to diversify geographically, the run-up to UP state elections
(likely in 2011) could create some near-term uncertainty for share performance
due to the group’s perceived political affiliations.
• Recycling of cashflows into new growth areas remains a common investor
concern across the conglomerate space, and on a fully consolidated basis we see
continued near-term gearing and cash flow pressures at JPA. However, we see
the company coming out of the woods by the end of FY12, when we expect
stronger cash flows from real estate and cement, reduction in gearing, clarity on
election outcomes, and possible improvements in fund-raising sentiment for
JPVL. Until then we see JPA as a relative market performer. We would become
stronger buyers of the shares at Rs80, representing 7.5x FY12E EV/EBITDA.
• Our SOP-based PT of Rs100 gets 52% of its value from real estate, 30%
from power, 12% from cement, 14% from construction, and incorporates a
20% conglomerate discount to account for remaining overhangs. Upside risks:
a revival in RE sentiment and political clarity would be potential stock catalysts
and would make us more positive on the upside potential of the shares.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jaiprakash Associates Ltd
Initiation
Neutral
JAIA.BO, JPA IN
Wait for the cement to set, initiate with Neutral
• Initiate coverage with Neutral, PT of Rs100. JPA is the flagship company of
the Jaypee group, with cement assets of 23mtpa, a captive hydropower
construction business, and real estate of ~690mn sft around Noida. It is also the
holding co. for the group’s listed IPP, Jaiprakash Power Ventures and listed
property developer Jaypee Infratech. JPA has successfully achieved size and
scale in each of its businesses: it is India’s 3rd largest cement producer, the
largest property developer in and around NCR, and the largest private
hydropower generator and hydropower construction company.
• Negative sentiment across real estate, power and cement over the past year
has led to underperformance. The stock looks to have found support, but
we see 2 broad overhangs which could limit a sustained rally in the shares over
the next few quarters: A) P/L and B/S related: As a result of capacity ramp-ups
in cement and power, higher debt could make earnings vulnerable to operational
and pricing risks and accelerate the need for new capital at JPVL, B) Sentiment
related: i) Even with strong real estate sales at Noida, sentiment remains
cautious towards developers and their stocks are trading at discounts to NAV,
ii) Despite efforts to diversify geographically, the run-up to UP state elections
(likely in 2011) could create some near-term uncertainty for share performance
due to the group’s perceived political affiliations.
• Recycling of cashflows into new growth areas remains a common investor
concern across the conglomerate space, and on a fully consolidated basis we see
continued near-term gearing and cash flow pressures at JPA. However, we see
the company coming out of the woods by the end of FY12, when we expect
stronger cash flows from real estate and cement, reduction in gearing, clarity on
election outcomes, and possible improvements in fund-raising sentiment for
JPVL. Until then we see JPA as a relative market performer. We would become
stronger buyers of the shares at Rs80, representing 7.5x FY12E EV/EBITDA.
• Our SOP-based PT of Rs100 gets 52% of its value from real estate, 30%
from power, 12% from cement, 14% from construction, and incorporates a
20% conglomerate discount to account for remaining overhangs. Upside risks:
a revival in RE sentiment and political clarity would be potential stock catalysts
and would make us more positive on the upside potential of the shares.
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