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UBS Investment Research
Jaiprakash Associates Limited
Infra powerhouse at attractive valuations
Strong growth led by expanded cement/power capacity, real estate sales
We forecast the consolidated earnings of Jaiprakash Associates (JAL), a large
infrastructure conglomerate in India, to more than quadruple over FY10-13 as it
more than doubles its effective cement capacity, sells 38m sq ft of real estate in the
National Capital Region, and triples its power capacity during this period.
Cost competitiveness a key advantage; strong execution track record
JAL has cost advantages across its businesses—low-cost land and tax benefits for
Jaypee Infratech’s real estate business, superior margins to peers in the cement
business due to logistical advantages and fiscal benefits, and primarily domestic
coal at its thermal power plants. We believe JAL’s track record of developing large
projects should enable it to complete its remaining project pipeline.
Power capex to keep debt high, though standalone leverage to trend down
The company has leveraged itself to expand capacity in its businesses in the past
few years. We think it will need additional debt for its power business—about
US$3bn over the next three years. However, with the completion of cement capex
in FY12, we expect the standalone entity to repay debt from FY13. Cash
generation would also start from two large projects that are likely to be
commissioned in FY12—the Yamuna Expressway in Q4 FY12 and the Karcham
Wangtoo hydro-electric power project in mid-FY12.
Valuation: initiate coverage with a Buy rating and price target of Rs115.00
We base our price target on a sum-of-the-parts valuation. JAL is trading at an
FY12E PE of 15x, at the low end of its historical range (11-35x).
Investment Thesis
JAL is a large infrastructure conglomerate in India with a presence in the
following sectors: 1) cement (the third-largest group, approximately 36mt
capacity by FY13E); 2) power (the largest private sector hydro-electric power
utility, approximately 2,200MW capacity by FY13E); 3) real estate (one of the
largest landbanks in the National Capital Region (NCR) with over 475m sq ft of
developable area); 4) engineering & construction (E&C, the largest company in
the hydro-electric power sector); 5) expressways/highways; and 6) hospitality.
We forecast JAL’s consolidated earnings to more than quadruple over FY10-13,
on: 1) a more than doubling of effective cement capacity (currently 25mt
operational); 2) sales of 38m sq ft of real estate in the NCR (it had sold 30m sq
ft as at end-FY10); and 3) a tripling of power capacity during this period
(currently 700MW is operational).
JAL’s strong execution capability has enabled it to emerge as a dominant player
in its various business segments, with scale and cost competitiveness being key
features. These businesses have solid competitive advantages: 1) cement—size,
geographical spread, and low costs; 2) power—a good fuel mix and domestic
coal; 3) real estate—low-cost land and tax benefits; and 4) E&C—its end-to-end
capability and high margins.
JAL has leveraged itself to build these large-scale businesses and we forecast
gross debt of US$9bn at end-FY11. The company’s capex cycle was strong over
FY07-10: 1) cement capacity additions (23mt from 7mt); 2) the 165km
expressway; and 3) the 1,000MW hydro power project. Although further capex
(and hence increasing debt requirements) will be required in the power business,
capex requirements for JAL’s other businesses will largely end in FY12—the
current cement capacity expansion programme will end with 36mt and the
Yamuna Expressway will be operational in Q4 FY12. We expect debt
repayment/free cash generation in the standalone entity from FY13 onwards.
In the power segment: 1) domestic coal is already available for 80% of the
company’s requirements; 2) equipment orders have been placed with established
manufacturers, and JAL has a strong execution track record (significant capex
already undertaken in under-construction projects); and 3) the 1,000MW
Karcham Wangtoo hydro-electric power project is likely to be commissioned in
mid-FY12 and will start to generate cash flow.
JAL is trading at an FY12E PE of 15x, at the low end of its historical range (11-
35x). We consider this attractive, and believe there is upside risk to our
valuation assumptions for JAL’s various businesses. Further, there could be
additional value accretion in the medium term from execution of its strong
project pipeline. We initiate coverage with a Buy rating and a price target of
Rs115.
Key catalysts
Strong cement volume growth led by capacity additions. We forecast a
CAGR of 33% for cement volumes over FY10-13 on 22mt of capacity
additions over FY09-12E (cement sales increased 53% YoY in the April
2010-February 2011 period). About 40% of these capacity additions are
likely to be commissioned in FY12.
Commissioning of various key projects. We expect three projects to be
commissioned over the next year:
— The 1,000MW Karcham Wangtoo hydro-power plant. Karcham
Wangtoo, the largest private sector hydro-power plant in India, is likely to
be commissioned in H1 FY12 (six months ahead of schedule). We expect
this project to generate EBITDA of Rs5.5bn pa.
— The 165km Yamuna Expressway. This expressway (the country’s
longest six-lane access-controlled concrete expressway) is likely to be
operational in Q4 FY12.
— Formula One race track: JAL is building India’s first Formula One race
track and the first race is scheduled for October 2011.
Equity raising in the power business. The power business has equity
funding requirement of about US$500m over the next three years. We would
view any capital raising positively as it would help to reduce leverage and
add visibility on project execution.
Risks
We believe key risks include: 1) high debt levels, which will impact earnings in a
high-interest rate environment (consolidated net debt of about US$6bn at end-FY10,
US$9bn by end-FY13E); 2) equity funding requirement of about S$500m over the
next three years in the power subsidiary (leverage in this subsidiary remains high at
about 3x currently); 3) execution of large plans (over 7,000MW) in the power
segment; 4) concentration of real estate in the Noida region, which might impact
pricing or delay launches because of JAL’s large-scale real estate development
plans; 5) lower toll revenues for the Yamuna Expressway as the expected shift of
traffic from the parallel highway might not happen; and 6) pressure on EBITDA
margins due to overcapacity in the cement industry in FY12E.
Valuation and basis for our price target
Our sum-of-the-parts (SOTP)-based price target of Rs115.00 assumes: 1) a 6.5x
one-year forward EV/EBITDA for the cement business; 2) a DCF-based
valuation for the power segment; 3) a 6x one-year forward EV/EBITDA for the
construction business; 4) a DCF-based valuation for Jaypee Infratech; 5) a DCFbased
valuation for the real estate business; 6) 10x one-year forward
EV/EBITDA for the hospitality segment; and 7) book value for investments and
net debt. JAL is trading at an FY12E PE of 15x, towards the low end of its
historical range (11-35x). Cement and power companies have tended to trade
between 10-20x. The full benefit of JAL’s cement capacity expansion would
accrue only from FY13 and for the power segment beyond that.
Jaiprakash Associates Limited
Jaiprakash Associates is a large infrastructure conglomerate in India, with a
presence in a large number of businesses including cement, power, real estate,
engineering and construction, expressways/highways, and hospitality.
Statement of Risk
We believe key risks include: 1) high debt levels, which will impact earnings in
a high-interest rate environment (consolidated net debt of about US$6bn at end-
FY10, US$9bn by end-FY13E); 2) equity funding requirement of about S$500m
over the next three years in the power subsidiary (leverage in this subsidiary
remains high at about 3x currently); 3) execution of large plans (over 7,000MW)
in the power segment; 4) concentration of real estate in the Noida region, which
might impact pricing or delay launches because of JAL’s large-scale real estate
development plans; 5) lower toll revenues for the Yamuna Expressway as the
expected shift of traffic from the parallel highway might not happen; and
6) pressure on EBITDA margins due to overcapacity in the cement industry in
FY12E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Jaiprakash Associates Limited
Infra powerhouse at attractive valuations
Strong growth led by expanded cement/power capacity, real estate sales
We forecast the consolidated earnings of Jaiprakash Associates (JAL), a large
infrastructure conglomerate in India, to more than quadruple over FY10-13 as it
more than doubles its effective cement capacity, sells 38m sq ft of real estate in the
National Capital Region, and triples its power capacity during this period.
Cost competitiveness a key advantage; strong execution track record
JAL has cost advantages across its businesses—low-cost land and tax benefits for
Jaypee Infratech’s real estate business, superior margins to peers in the cement
business due to logistical advantages and fiscal benefits, and primarily domestic
coal at its thermal power plants. We believe JAL’s track record of developing large
projects should enable it to complete its remaining project pipeline.
Power capex to keep debt high, though standalone leverage to trend down
The company has leveraged itself to expand capacity in its businesses in the past
few years. We think it will need additional debt for its power business—about
US$3bn over the next three years. However, with the completion of cement capex
in FY12, we expect the standalone entity to repay debt from FY13. Cash
generation would also start from two large projects that are likely to be
commissioned in FY12—the Yamuna Expressway in Q4 FY12 and the Karcham
Wangtoo hydro-electric power project in mid-FY12.
Valuation: initiate coverage with a Buy rating and price target of Rs115.00
We base our price target on a sum-of-the-parts valuation. JAL is trading at an
FY12E PE of 15x, at the low end of its historical range (11-35x).
Investment Thesis
JAL is a large infrastructure conglomerate in India with a presence in the
following sectors: 1) cement (the third-largest group, approximately 36mt
capacity by FY13E); 2) power (the largest private sector hydro-electric power
utility, approximately 2,200MW capacity by FY13E); 3) real estate (one of the
largest landbanks in the National Capital Region (NCR) with over 475m sq ft of
developable area); 4) engineering & construction (E&C, the largest company in
the hydro-electric power sector); 5) expressways/highways; and 6) hospitality.
We forecast JAL’s consolidated earnings to more than quadruple over FY10-13,
on: 1) a more than doubling of effective cement capacity (currently 25mt
operational); 2) sales of 38m sq ft of real estate in the NCR (it had sold 30m sq
ft as at end-FY10); and 3) a tripling of power capacity during this period
(currently 700MW is operational).
JAL’s strong execution capability has enabled it to emerge as a dominant player
in its various business segments, with scale and cost competitiveness being key
features. These businesses have solid competitive advantages: 1) cement—size,
geographical spread, and low costs; 2) power—a good fuel mix and domestic
coal; 3) real estate—low-cost land and tax benefits; and 4) E&C—its end-to-end
capability and high margins.
JAL has leveraged itself to build these large-scale businesses and we forecast
gross debt of US$9bn at end-FY11. The company’s capex cycle was strong over
FY07-10: 1) cement capacity additions (23mt from 7mt); 2) the 165km
expressway; and 3) the 1,000MW hydro power project. Although further capex
(and hence increasing debt requirements) will be required in the power business,
capex requirements for JAL’s other businesses will largely end in FY12—the
current cement capacity expansion programme will end with 36mt and the
Yamuna Expressway will be operational in Q4 FY12. We expect debt
repayment/free cash generation in the standalone entity from FY13 onwards.
In the power segment: 1) domestic coal is already available for 80% of the
company’s requirements; 2) equipment orders have been placed with established
manufacturers, and JAL has a strong execution track record (significant capex
already undertaken in under-construction projects); and 3) the 1,000MW
Karcham Wangtoo hydro-electric power project is likely to be commissioned in
mid-FY12 and will start to generate cash flow.
JAL is trading at an FY12E PE of 15x, at the low end of its historical range (11-
35x). We consider this attractive, and believe there is upside risk to our
valuation assumptions for JAL’s various businesses. Further, there could be
additional value accretion in the medium term from execution of its strong
project pipeline. We initiate coverage with a Buy rating and a price target of
Rs115.
Key catalysts
Strong cement volume growth led by capacity additions. We forecast a
CAGR of 33% for cement volumes over FY10-13 on 22mt of capacity
additions over FY09-12E (cement sales increased 53% YoY in the April
2010-February 2011 period). About 40% of these capacity additions are
likely to be commissioned in FY12.
Commissioning of various key projects. We expect three projects to be
commissioned over the next year:
— The 1,000MW Karcham Wangtoo hydro-power plant. Karcham
Wangtoo, the largest private sector hydro-power plant in India, is likely to
be commissioned in H1 FY12 (six months ahead of schedule). We expect
this project to generate EBITDA of Rs5.5bn pa.
— The 165km Yamuna Expressway. This expressway (the country’s
longest six-lane access-controlled concrete expressway) is likely to be
operational in Q4 FY12.
— Formula One race track: JAL is building India’s first Formula One race
track and the first race is scheduled for October 2011.
Equity raising in the power business. The power business has equity
funding requirement of about US$500m over the next three years. We would
view any capital raising positively as it would help to reduce leverage and
add visibility on project execution.
Risks
We believe key risks include: 1) high debt levels, which will impact earnings in a
high-interest rate environment (consolidated net debt of about US$6bn at end-FY10,
US$9bn by end-FY13E); 2) equity funding requirement of about S$500m over the
next three years in the power subsidiary (leverage in this subsidiary remains high at
about 3x currently); 3) execution of large plans (over 7,000MW) in the power
segment; 4) concentration of real estate in the Noida region, which might impact
pricing or delay launches because of JAL’s large-scale real estate development
plans; 5) lower toll revenues for the Yamuna Expressway as the expected shift of
traffic from the parallel highway might not happen; and 6) pressure on EBITDA
margins due to overcapacity in the cement industry in FY12E.
Valuation and basis for our price target
Our sum-of-the-parts (SOTP)-based price target of Rs115.00 assumes: 1) a 6.5x
one-year forward EV/EBITDA for the cement business; 2) a DCF-based
valuation for the power segment; 3) a 6x one-year forward EV/EBITDA for the
construction business; 4) a DCF-based valuation for Jaypee Infratech; 5) a DCFbased
valuation for the real estate business; 6) 10x one-year forward
EV/EBITDA for the hospitality segment; and 7) book value for investments and
net debt. JAL is trading at an FY12E PE of 15x, towards the low end of its
historical range (11-35x). Cement and power companies have tended to trade
between 10-20x. The full benefit of JAL’s cement capacity expansion would
accrue only from FY13 and for the power segment beyond that.
Jaiprakash Associates Limited
Jaiprakash Associates is a large infrastructure conglomerate in India, with a
presence in a large number of businesses including cement, power, real estate,
engineering and construction, expressways/highways, and hospitality.
Statement of Risk
We believe key risks include: 1) high debt levels, which will impact earnings in
a high-interest rate environment (consolidated net debt of about US$6bn at end-
FY10, US$9bn by end-FY13E); 2) equity funding requirement of about S$500m
over the next three years in the power subsidiary (leverage in this subsidiary
remains high at about 3x currently); 3) execution of large plans (over 7,000MW)
in the power segment; 4) concentration of real estate in the Noida region, which
might impact pricing or delay launches because of JAL’s large-scale real estate
development plans; 5) lower toll revenues for the Yamuna Expressway as the
expected shift of traffic from the parallel highway might not happen; and
6) pressure on EBITDA margins due to overcapacity in the cement industry in
FY12E.
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