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Jaypee Infratech
Initiation
Overweight
JYPE.BO, JPIN IN
Cash engine
Jaypee Infratech (JPIN) offers an attractive risk-reward profile, in our
view. The stock is trading at an EV/psf (implied land cost) of Rs190,
below estimated replacement cost. The company has a forward cash flow
yield (FCFE) of 13%, and one of the best sector ROEs (+25%). With work
on the toll road largely done and low-cost land locked in, we believe the
company will become the cash cow in JPA’s portfolio. This raises the
possibility of JPIN returning capital to the parentco (83% shareholder) via
dividends (FY12E yield of 5%). Initiate with OW, Mar-12 PT of Rs80,
in line with our DCF-based sum of the parts, which values cash flows for
next five years and remaining land at average of Rs270 psf.
• Key share price catalysts are largely 2H-weighted and relate to 1)
start of toll collection in 4Q12, 2) announcements of dividends by
JPIN (maiden DPU of Rs0.75 announced in 3Q10), 3) launch of two
additional land parcels (Agra, GB Nagar), and 4) opening of a Formula
One racetrack, (Oct-11). This should serve as a high profile brandbuilding
exercise for residential developments nearby.
• Noida growth – Is it real? Noida region offers quality infrastructure,
easy connectivity to Delhi, and affordable housing. However, sales
numbers emanating out of the market are high relative to the
population base of the city or history. Level of construction in the area
is commensurate with the creation of a virtually new megapolis. Each
of JPIN’s 1,000 acre+ parcels along the expressway is a mini-city in
itself. The true test of this market/model may come up in FY12/13
when big deliveries start to happen. Until then fundamental concerns
about the market may weigh on the stock.
• Political risks could come to the fore around mid2012, even as
controversies surrounding the YE project seem to be subsiding. We
note that now there is a Supreme Court verdict as well which has
validated land acquisition by JPIN. The project also had received an
approval from the principal opposition party (SP) in 2007. However
there are still some protests around the project and certain
environmental issues still need to be resolved for a few parcels.
Key share price catalysts
Over the next one year we see six key fundamental share price catalysts. These are
1. Commencement of Yamuna Expressway (expected by 3QCY11).
2. Guidance on dividend payment: After recording its maiden interim
dividend of 0.75p, we do expect JPIN to start returning more cash to
parentco (and investors) via dividends. Any positive guidance (30-40%
payout) or increase in the same in FY12 would be a positive.
3. Start of Formula 1 race (Oct -11) in Noida (First time in India): This
should serve as a high-profile brand building exercise for Jaypee group and
have a knock-on effect on nearby residential developments.
4. Auctions in Noida market: Noida RE market is witnessing a number of
auctions and transactions around the region should help set a benchmark
(atleast for parcel 1) for JPIN. The latest transaction in Noida was by Wave
group (for Rs70B) done at almost Rs180MM/acre and Logix group (for
Rs10B) for Rs150MM/acre.
5. Response to the planned launches at parcel 3 in Gautam Buddha Nagar.
Company expects the same to be launched around by 2QCY11.
Key risks to our view
1. Political news flow - A new political combination at the helm in mid-2012
could start creating some overhang. Yamuna Expressway project has seen
significant delays since its inception (in 2003) given farmer protests over
land acquisition, environmental issues and political opposition. Most of the
land acquisition/work on the project has been completed under the current
UP government (BSP). The previous government (SP) too gave it clearance
in 2007, albeit after having blocked it for four years. There is however still
some political opposition (notably from BJP) to the project. This could
create an overhang around FY13 when Uttar Pradesh elections get
underway.
2. Noida – Is the “unreal” growth real? Noida/G Noida region offers quality
infrastructure, easy connectivity to Delhi, and affordable housing. However,
sales numbers emanating from the market are high relative to the population
base of the city or history. The level of construction in the area is
commensurate with the creation of a virtually new megapolis. Each of
Jaypee’s 1,000 acre+ parcels along the 165KM expressway is a mini-city in
itself. The true test of this market/ model may then come up in FY12/13
when big deliveries start to happen. Noida’s big leap into a bustling city
may well happen at a faster pace than Gurgaon but will still take some time.
Until such time, fundamental concerns about the market may weigh on the
stock.
3. Percieved non-accretive acquisitions by the company from the parentco
potentially at a later stage: We note that JPA (parentco) also has an
interest in high-end real estate (in Noida/ G Noida) and via Sports city
venture (2500 acres). JPIN over time is expected to become the main
vehicle for executing RE projects for the group. This raises the possibility of
the company buying out assets from the parent. If such a buyout were to
occur at a price higher than the “perceived market rate” it could create an
overhang.
4. A big part of our Overweight thesis is that JPIN will become the cash cow
in JPA’s portfolio and will possibly start returning capital to the parentco
via dividends. If such dividends are lower than expected (Rs3/share in
FY12) due to lower payout ratios, it could lead to accumulation of nonperforming
cash assets on the B/S and question our dividend yield
argument.
5. Low free float at 17% - JPA still holds 83% of the company and over time
needs to bring its float down to 75% ( to comply with SEBI listing norms).
This creates a dilution overhang and also the potential usage of new capital
(since capex on core business is largely done).
Attractive risk-reward ratio: Trading at EV psf of sub Rs200,
+20% ROE, high dividend payout, and 13% cash flow yield
JPIN’s valuations are at compelling levels, in our view, and we believe the stock
offers an attractive risk-reward profile from here. The company satisfies most of the
criteria that we would define for a value pick, i.e.:
1. Trading below replacement cost: The company is currently trading at an
EV/psf of land at Rs190 (for converted land), significantly below
replacement cost. At a 1.5-2x FSI this translates into a land cost of
Rs15MM/Acre. Land in similarly priced locations in NCR is available for
>Rs500psf (e.g. New Gurgaon) or Rs30MM/Acre. Over and above this, the
developers also have to incur conversion charges of Rs150-200 psf. JPIN’s
land is completely aggregated (where premiums are very high) and use
conversions are in place.
2. High FCFE yield: Given that the investments from toll road are largely
done, JPIN should start becoming a massive FCF generator. We estimate
the company to start generating Rs11-12B in cash flow (after interest/tax),
which would put the stock at a 13% FCFE yield starting in FY12. At a 5-6x
forward P/E the stock looks reasonable.
3. Positive earnings surprise thus far and low P/E: The company has
surprised positively on earnings thus far (current FY11E consensus EPS of
Rs10.6 vs. Sep-10 levels of Rs7.5), and even on consensus estimates the
stock is trading at 6x forward earnings.
4. High level cash collections despite concerns on "broker" sales: A key
concern about the Noida market has been potentially high involvement of
broker underwriting inventory for RE developers. We note that JPIN’s cash
collections thus far have been very robust (Rs92B sold and Rs41B
collected). This suggests at least some level of end-user buying, as a US$1B
amount is pretty much above capabilities of multiple brokers to pay up.
5. High ROE (FY12 25%) and low gearing: The company is likely to finish
FY11 at an average ROE of 30% (FY12E 25% thanks to cheap land cost).
The company currently has net debt of Rs36B (0.7x Net D/E) which can be
easily serviced from toll annuities of Rs3B+ and cash collections from RE
development (Rs92B locked-in sales).
6. Possibility of high dividend payouts: With a large part of toll road capex
completed, JPIN will probably become one of the first high-dividend-payout
companies in the RE space (FY12E DPS of Rs3). Even if JPIN chooses to
retire a substantial part of debt in the near term, the payout ratios should
remain healthy (30-40%).
7. Strong contractor in parent: Execution thus far on toll road construction
is running ahead of schedule. JPA is a well known contractor, having built
large-scale power projects in the country. Thus far RE construction has been
on track. It also helps that most of the approvals for key land parcels are
already in place.
Cheap even on relative basis in a “beaten-down” sector
Comparing JPIN to other listed developers, despite a better ROE, operating cash flow
and positive earnings revisions (sector has seen negative revisions), the stock is
trading below peer group on P/E and EV/psf basis. The dividend yield of the
company is the highest across the space. On a P/BV basis, though, it is at a premium;
however, we believe a best-in-sector ROE more than compensates for this.
Free cash flow generator: JPIN should become the “cash
cow” in the group’s portfolio
With capex on the expressway largely completed (~95% already incurred) and the
majority (87%) of the land parcels for township projects already in place, JPIN is
well placed to throw up substantial operating cash surplus. We expect the company
to generate FCFE of Rs10-11B or Rs8 per share per annum aided by collections from
the real estate pre-sales (Rs92B achieved to date) and steady toll revenues (Rs3B+
from FY13) from Yamuna Expressway.
These cash flows will likely be used to:
1. Retire some debt – JPIN’s current net debt of Rs36B is primarily long-term
infrastructure debt with repayments starting in FY13 and amortizable over
the next 12-13 years (by 2025). Once the toll road starts, a large part of this
can be serviced by securitizing toll revenues, leaving core RE business
almost free of any debt. Nonetheless we expect to JPIN to reduce its gross
debt by Rs 10B over the next two years.
2. Repatriate capital to parentco via dividends: JPA holds 83% of JPIN and
JPIN is the cash cow of JP's portfolio. Therefore it is reasonable to assume
that the company could look to repatriate capital back to the parent co via
dividends. Assuming a 30% payout ratio (vs. management guidance of
50%) and Rs10 EPS, the annual dividends from the company could rise to
Rs3/share.
3. Buyout RE assets from the parentco: We note that JPA too has substantial
real estate assets (32 msf high end land in Noida and 2500 acre sports city
complex). Increasing cash flows in the core RE business in JPIN could then
be used to support a buyout of the RE business from JPA sometime later. In
such a scenario th evaluation of the assets will be critical.
We believe our estimates are conservative: Modeling 15%
booking decline in FY11 and approx 30% below guidance
JPIN’s focus on volumes has yielded impressive results. The company has achieved
bookings of over 31msf/Rs92B over the last two years from its Noida parcel (Jaypee
Greens Township). The average ticket size across Jaypee’s product offering is
Rs2.5M-6.5M and the average selling price is currently in the range of Rs3,000-
3,300 psf, one of the most affordable products available in NCR region.
The company has now achieved decent success in monetization of its Noida parcel 1
(Wishtown) launch (31msf of 78msf sold). However, incremental sales from this
township are likely to be limited as company expects realizations to increase once the
initial deliveries happen and Yamuna Expressway is fully operational.
Incrementally, sales are likely to pick up from Parcel 3 in Gautam Buddha Nagar.
Initial master planning for the same has already begun and is expected to be launched
by 1QFY12. The two parcels in Gautam Budha Nagar (parcel 2 & 3) are adjacent to
the JP Associate's (JAL) sports city project and overall plan is to develop an
integrated mixed use township of 5,000acres across the three parcels.
Our assumptions on incremental sales are conservative and much lower than
company targets. Against management expectations of Rs45B bookings and
FY11 bookings run rate of Rs37B, we are modeling in a 15% de-growth in FY12
(Rs 32B). This is on account of lower realizations from parcels 2 and 3 (Average
realizations taken at Rs 2300-2400 psf).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jaypee Infratech
Initiation
Overweight
JYPE.BO, JPIN IN
Cash engine
Jaypee Infratech (JPIN) offers an attractive risk-reward profile, in our
view. The stock is trading at an EV/psf (implied land cost) of Rs190,
below estimated replacement cost. The company has a forward cash flow
yield (FCFE) of 13%, and one of the best sector ROEs (+25%). With work
on the toll road largely done and low-cost land locked in, we believe the
company will become the cash cow in JPA’s portfolio. This raises the
possibility of JPIN returning capital to the parentco (83% shareholder) via
dividends (FY12E yield of 5%). Initiate with OW, Mar-12 PT of Rs80,
in line with our DCF-based sum of the parts, which values cash flows for
next five years and remaining land at average of Rs270 psf.
• Key share price catalysts are largely 2H-weighted and relate to 1)
start of toll collection in 4Q12, 2) announcements of dividends by
JPIN (maiden DPU of Rs0.75 announced in 3Q10), 3) launch of two
additional land parcels (Agra, GB Nagar), and 4) opening of a Formula
One racetrack, (Oct-11). This should serve as a high profile brandbuilding
exercise for residential developments nearby.
• Noida growth – Is it real? Noida region offers quality infrastructure,
easy connectivity to Delhi, and affordable housing. However, sales
numbers emanating out of the market are high relative to the
population base of the city or history. Level of construction in the area
is commensurate with the creation of a virtually new megapolis. Each
of JPIN’s 1,000 acre+ parcels along the expressway is a mini-city in
itself. The true test of this market/model may come up in FY12/13
when big deliveries start to happen. Until then fundamental concerns
about the market may weigh on the stock.
• Political risks could come to the fore around mid2012, even as
controversies surrounding the YE project seem to be subsiding. We
note that now there is a Supreme Court verdict as well which has
validated land acquisition by JPIN. The project also had received an
approval from the principal opposition party (SP) in 2007. However
there are still some protests around the project and certain
environmental issues still need to be resolved for a few parcels.
Key share price catalysts
Over the next one year we see six key fundamental share price catalysts. These are
1. Commencement of Yamuna Expressway (expected by 3QCY11).
2. Guidance on dividend payment: After recording its maiden interim
dividend of 0.75p, we do expect JPIN to start returning more cash to
parentco (and investors) via dividends. Any positive guidance (30-40%
payout) or increase in the same in FY12 would be a positive.
3. Start of Formula 1 race (Oct -11) in Noida (First time in India): This
should serve as a high-profile brand building exercise for Jaypee group and
have a knock-on effect on nearby residential developments.
4. Auctions in Noida market: Noida RE market is witnessing a number of
auctions and transactions around the region should help set a benchmark
(atleast for parcel 1) for JPIN. The latest transaction in Noida was by Wave
group (for Rs70B) done at almost Rs180MM/acre and Logix group (for
Rs10B) for Rs150MM/acre.
5. Response to the planned launches at parcel 3 in Gautam Buddha Nagar.
Company expects the same to be launched around by 2QCY11.
Key risks to our view
1. Political news flow - A new political combination at the helm in mid-2012
could start creating some overhang. Yamuna Expressway project has seen
significant delays since its inception (in 2003) given farmer protests over
land acquisition, environmental issues and political opposition. Most of the
land acquisition/work on the project has been completed under the current
UP government (BSP). The previous government (SP) too gave it clearance
in 2007, albeit after having blocked it for four years. There is however still
some political opposition (notably from BJP) to the project. This could
create an overhang around FY13 when Uttar Pradesh elections get
underway.
2. Noida – Is the “unreal” growth real? Noida/G Noida region offers quality
infrastructure, easy connectivity to Delhi, and affordable housing. However,
sales numbers emanating from the market are high relative to the population
base of the city or history. The level of construction in the area is
commensurate with the creation of a virtually new megapolis. Each of
Jaypee’s 1,000 acre+ parcels along the 165KM expressway is a mini-city in
itself. The true test of this market/ model may then come up in FY12/13
when big deliveries start to happen. Noida’s big leap into a bustling city
may well happen at a faster pace than Gurgaon but will still take some time.
Until such time, fundamental concerns about the market may weigh on the
stock.
3. Percieved non-accretive acquisitions by the company from the parentco
potentially at a later stage: We note that JPA (parentco) also has an
interest in high-end real estate (in Noida/ G Noida) and via Sports city
venture (2500 acres). JPIN over time is expected to become the main
vehicle for executing RE projects for the group. This raises the possibility of
the company buying out assets from the parent. If such a buyout were to
occur at a price higher than the “perceived market rate” it could create an
overhang.
4. A big part of our Overweight thesis is that JPIN will become the cash cow
in JPA’s portfolio and will possibly start returning capital to the parentco
via dividends. If such dividends are lower than expected (Rs3/share in
FY12) due to lower payout ratios, it could lead to accumulation of nonperforming
cash assets on the B/S and question our dividend yield
argument.
5. Low free float at 17% - JPA still holds 83% of the company and over time
needs to bring its float down to 75% ( to comply with SEBI listing norms).
This creates a dilution overhang and also the potential usage of new capital
(since capex on core business is largely done).
Attractive risk-reward ratio: Trading at EV psf of sub Rs200,
+20% ROE, high dividend payout, and 13% cash flow yield
JPIN’s valuations are at compelling levels, in our view, and we believe the stock
offers an attractive risk-reward profile from here. The company satisfies most of the
criteria that we would define for a value pick, i.e.:
1. Trading below replacement cost: The company is currently trading at an
EV/psf of land at Rs190 (for converted land), significantly below
replacement cost. At a 1.5-2x FSI this translates into a land cost of
Rs15MM/Acre. Land in similarly priced locations in NCR is available for
>Rs500psf (e.g. New Gurgaon) or Rs30MM/Acre. Over and above this, the
developers also have to incur conversion charges of Rs150-200 psf. JPIN’s
land is completely aggregated (where premiums are very high) and use
conversions are in place.
2. High FCFE yield: Given that the investments from toll road are largely
done, JPIN should start becoming a massive FCF generator. We estimate
the company to start generating Rs11-12B in cash flow (after interest/tax),
which would put the stock at a 13% FCFE yield starting in FY12. At a 5-6x
forward P/E the stock looks reasonable.
3. Positive earnings surprise thus far and low P/E: The company has
surprised positively on earnings thus far (current FY11E consensus EPS of
Rs10.6 vs. Sep-10 levels of Rs7.5), and even on consensus estimates the
stock is trading at 6x forward earnings.
4. High level cash collections despite concerns on "broker" sales: A key
concern about the Noida market has been potentially high involvement of
broker underwriting inventory for RE developers. We note that JPIN’s cash
collections thus far have been very robust (Rs92B sold and Rs41B
collected). This suggests at least some level of end-user buying, as a US$1B
amount is pretty much above capabilities of multiple brokers to pay up.
5. High ROE (FY12 25%) and low gearing: The company is likely to finish
FY11 at an average ROE of 30% (FY12E 25% thanks to cheap land cost).
The company currently has net debt of Rs36B (0.7x Net D/E) which can be
easily serviced from toll annuities of Rs3B+ and cash collections from RE
development (Rs92B locked-in sales).
6. Possibility of high dividend payouts: With a large part of toll road capex
completed, JPIN will probably become one of the first high-dividend-payout
companies in the RE space (FY12E DPS of Rs3). Even if JPIN chooses to
retire a substantial part of debt in the near term, the payout ratios should
remain healthy (30-40%).
7. Strong contractor in parent: Execution thus far on toll road construction
is running ahead of schedule. JPA is a well known contractor, having built
large-scale power projects in the country. Thus far RE construction has been
on track. It also helps that most of the approvals for key land parcels are
already in place.
Cheap even on relative basis in a “beaten-down” sector
Comparing JPIN to other listed developers, despite a better ROE, operating cash flow
and positive earnings revisions (sector has seen negative revisions), the stock is
trading below peer group on P/E and EV/psf basis. The dividend yield of the
company is the highest across the space. On a P/BV basis, though, it is at a premium;
however, we believe a best-in-sector ROE more than compensates for this.
Free cash flow generator: JPIN should become the “cash
cow” in the group’s portfolio
With capex on the expressway largely completed (~95% already incurred) and the
majority (87%) of the land parcels for township projects already in place, JPIN is
well placed to throw up substantial operating cash surplus. We expect the company
to generate FCFE of Rs10-11B or Rs8 per share per annum aided by collections from
the real estate pre-sales (Rs92B achieved to date) and steady toll revenues (Rs3B+
from FY13) from Yamuna Expressway.
These cash flows will likely be used to:
1. Retire some debt – JPIN’s current net debt of Rs36B is primarily long-term
infrastructure debt with repayments starting in FY13 and amortizable over
the next 12-13 years (by 2025). Once the toll road starts, a large part of this
can be serviced by securitizing toll revenues, leaving core RE business
almost free of any debt. Nonetheless we expect to JPIN to reduce its gross
debt by Rs 10B over the next two years.
2. Repatriate capital to parentco via dividends: JPA holds 83% of JPIN and
JPIN is the cash cow of JP's portfolio. Therefore it is reasonable to assume
that the company could look to repatriate capital back to the parent co via
dividends. Assuming a 30% payout ratio (vs. management guidance of
50%) and Rs10 EPS, the annual dividends from the company could rise to
Rs3/share.
3. Buyout RE assets from the parentco: We note that JPA too has substantial
real estate assets (32 msf high end land in Noida and 2500 acre sports city
complex). Increasing cash flows in the core RE business in JPIN could then
be used to support a buyout of the RE business from JPA sometime later. In
such a scenario th evaluation of the assets will be critical.
We believe our estimates are conservative: Modeling 15%
booking decline in FY11 and approx 30% below guidance
JPIN’s focus on volumes has yielded impressive results. The company has achieved
bookings of over 31msf/Rs92B over the last two years from its Noida parcel (Jaypee
Greens Township). The average ticket size across Jaypee’s product offering is
Rs2.5M-6.5M and the average selling price is currently in the range of Rs3,000-
3,300 psf, one of the most affordable products available in NCR region.
The company has now achieved decent success in monetization of its Noida parcel 1
(Wishtown) launch (31msf of 78msf sold). However, incremental sales from this
township are likely to be limited as company expects realizations to increase once the
initial deliveries happen and Yamuna Expressway is fully operational.
Incrementally, sales are likely to pick up from Parcel 3 in Gautam Buddha Nagar.
Initial master planning for the same has already begun and is expected to be launched
by 1QFY12. The two parcels in Gautam Budha Nagar (parcel 2 & 3) are adjacent to
the JP Associate's (JAL) sports city project and overall plan is to develop an
integrated mixed use township of 5,000acres across the three parcels.
Our assumptions on incremental sales are conservative and much lower than
company targets. Against management expectations of Rs45B bookings and
FY11 bookings run rate of Rs37B, we are modeling in a 15% de-growth in FY12
(Rs 32B). This is on account of lower realizations from parcels 2 and 3 (Average
realizations taken at Rs 2300-2400 psf).
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