Jaiprakash Associates - Take aim, don’t shoot .:Macquarie Research

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Jaiprakash Associates
Take aim, don’t shoot
Event
 JPA has reported its 4QFY11 results. Operating profit was below our
expectations due to pressure in margins in the construction business and
lower than expected improvement in profitability in the cement business. .
 We reduce our target price marginally to Rs91 (from Rs92) to factor in the
reduced valuation of JP Infratech (JPIN, Rs55, TP: Rs63, Neutral, Covered by
Unmesh Sharma) due to price-target cut by our property team. Retain Neutral.

Impact
 Cement fails to shine, high hopes in FY12: Cement volumes at 4.38mn
tons were up 20%, however EBIT/ton was down to Rs509/ton (-39% YoY).
Even on a QoQ basis, margin improvement was Rs174/ton v/s our
expectation of Rs290/ton. FY11 volumes at 16mn tons were up 45%.
 Pressure on cement profitability to continue into FY12: Management
has indicated that EBITDA/ton would be around Rs850, which we believe
is ambitious especially with our assumption of 40% volume growth. We
expect cement pricing to take a hit as JPA itself adds capacity, especially
in South India.
 Cement cycle needs to turn for us to get bullish: JPA’s capacity would
increase to 38mn tons by FY12end. For us to get bullish on JPA, the
cement cycle needs to turn from over-supply to a tightly supplied zone,
enabling us to value cement capacity at US$120-150/ton EV.
 Lower Siang project key to growth in construction revenues: Big
projects, eg the Yamuna Expressway, Karcham Wangtoo hydro plant and F1
sports track, will end by 1HFY12. For growth over Rs60bn revenues in FY11,
work has to begin on 2,700MW Lower Siang project, but environmental
clearance has not yet come and mobilisation for the US$6bn project will take
at least 6 months in our view. Construction margins fell significantly by 770bps
YoY to 12.4% in 4QFY11, which we think is due to lower margin orders. We
are building in 20% margin in FY12 against 15% achieved in FY11.
 Need clarity on consolidated numbers: We await details on the company’s
consolidated financial statements to understand its fiscal situation. High debt
in a rising interest rate environment and the equity funding gap in JP Power
remain areas of concern.
Earnings and target price revision
 Reduce our TP from Rs92 to Rs91 due to lower target price of JP Infratech.
Price catalyst
 12-month price target: Rs90.00 based on a Sum of Parts methodology.
 Catalyst: Approval for Lower Siang hydro project, funding for power projects
Action and recommendation
 Too early to get excited, retain Neutral: JPA is a high beta asset ownership
story in India. However, we believe JPA is likely to undergo a painful period
over the next 1-2 quarters. Fund raising in JP Power and progress of work on
Lower Siang remain key near-term triggers.