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Removed from Asia Pacific Buy List
Jaiprakash Associates (JAIA.BO)
Equity Research
Downgrade to Neutral; limited upside while high debt is a concern
What happened
We downgrade JPA to Neutral as the stock is now close to our unchanged
target price of Rs106. We see limited areas of potential positive surprise as
high debt levels remain a concern on earnings. Although next Q earnings
should improve on a sequential basis driven by better cement realizations,
higher interest outflow and delays being seen in commissioning power and
road assets may weigh the stock down, in our view. JPA is down 42.0% since
we added it to the Buy list on Sept 16 2009 vs. the Sensex +14.7%. We attribute
JPA’s underperformance to a difficult macro environment in India (inflation,
high interest rates, and slowdown in order inflow) and negative news flow.
Current view
In a rising interest rate environment, with consolidated net D/E of
above 3.0X, we are concerned of a deteriorating interest coverage
ratio – 1.8X as of FY11E (vs. 5 yr average of 3X).
Margins for the construction segment could come under pressure due
to rising raw material prices (from 17% in FY11 to 15% in FY12E) as
there is no room for pass through in the segment – almost all
contracts are for the company’s own projects.
Real estate sales continue to be strong, however, catalysts in the form of
commissioning of KW hydro power plant and Yamuna expressway have
been pushed back by a few months each and we now expect these in
mid CY11 and end FY12 respectively. Additionally, land acquisition
delays in Bara and Karchana thermal power plants also increase the
uncertainty around timely commissioning of these projects.
We retain our SOTP based 12-m TP of Rs 106. We increase our FY11E EPS by
6% to adjust for quarterly run rate on EBITDA margins (and make marginal
changes to FY12E/13E). We downgrade JPA to Neutral as it offers limited
upside vs. other stocks in our coverage. The stock currently trades at 12-m fwd
P/E of 19X, 21% below its historical median. Risks: Upside: improved realizations
on cement; downside: further increase in interest rates and raw material prices.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Removed from Asia Pacific Buy List
Jaiprakash Associates (JAIA.BO)
Equity Research
Downgrade to Neutral; limited upside while high debt is a concern
What happened
We downgrade JPA to Neutral as the stock is now close to our unchanged
target price of Rs106. We see limited areas of potential positive surprise as
high debt levels remain a concern on earnings. Although next Q earnings
should improve on a sequential basis driven by better cement realizations,
higher interest outflow and delays being seen in commissioning power and
road assets may weigh the stock down, in our view. JPA is down 42.0% since
we added it to the Buy list on Sept 16 2009 vs. the Sensex +14.7%. We attribute
JPA’s underperformance to a difficult macro environment in India (inflation,
high interest rates, and slowdown in order inflow) and negative news flow.
Current view
In a rising interest rate environment, with consolidated net D/E of
above 3.0X, we are concerned of a deteriorating interest coverage
ratio – 1.8X as of FY11E (vs. 5 yr average of 3X).
Margins for the construction segment could come under pressure due
to rising raw material prices (from 17% in FY11 to 15% in FY12E) as
there is no room for pass through in the segment – almost all
contracts are for the company’s own projects.
Real estate sales continue to be strong, however, catalysts in the form of
commissioning of KW hydro power plant and Yamuna expressway have
been pushed back by a few months each and we now expect these in
mid CY11 and end FY12 respectively. Additionally, land acquisition
delays in Bara and Karchana thermal power plants also increase the
uncertainty around timely commissioning of these projects.
We retain our SOTP based 12-m TP of Rs 106. We increase our FY11E EPS by
6% to adjust for quarterly run rate on EBITDA margins (and make marginal
changes to FY12E/13E). We downgrade JPA to Neutral as it offers limited
upside vs. other stocks in our coverage. The stock currently trades at 12-m fwd
P/E of 19X, 21% below its historical median. Risks: Upside: improved realizations
on cement; downside: further increase in interest rates and raw material prices.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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