JPMorgan -- Jaiprakash Associates: Deteriorating outlook for cement and real estate; stock view further weakens

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We cut FY12 estimates for JPA (parent) by 16%, following lower-thanexpected
cement demand growth and trimming real estate volumes. We cut
PT to Rs88 (earlier, Rs100), and believe continued headwinds for real estate,
power and cement verticals would cause stock weakness.
 Cement data points: Our cement team led by Pinakin Parekh is seeing weak
demand conditions as a risk to JPA’s capacity utilization, given the latter’s 36%
YoY capacity expansion. While prices have held relatively firm in North and
Central Indian markets (JPA’s key), they appear vulnerable to a breakdown if
demand is not supportive. The pricing discipline and demand growth would get
tested post monsoons. We cut parent cement volume estimates by 13% in FY12.
Our new vol. growth est. (7% parent, 12% consol) gives benefit to constructionled
demand push in 2HFY12. High debt of ~Rs115B in cement exposes
earnings to pricing shocks if any.
 Real estate situation: According to our real estate team led by Saurabh Kumar,
bookings may be impacted in Noida given ongoing land acquisition concerns.
At Noida extension (different area), land acquisition protests and recent SC
directive to return land to farmers (although not related to JP group) might
impact sales. While RE stocks have lately seen relief rallies, interest rates would
need to show signs of peaking before sustained rally. We cut JPA parent RE
booking value estimates by 8% / 15% for FY12 / 13.
 Power issues: JPA’s IPP subsidiary JPVL, has commissioned 2X250MW units
of 1000MW Karcham Wangtoo so far, and is selling power on short-term basis.
Uncertainty arises from project cost escalations (Rs71.5B vs Rs59B) not
approved. The PPA with PTC is under litigation, as tariff based on old cost is
low. In base case, we assume the revised project cost is approved and PPA:
merchant is 80:20. Downside arises from disapproval of cost escalation, while
upside could arise if the company succeeds in carving out a higher merchant
component while renegotiating the PPA.
 Our new SOP-based Mar-12 PT of Rs88 is based on a) cement EV of
US$100/ton (earlier 110): this reduced our PT by Rs8 and b) For JPA-held real
estate, lower bookings and higher discount rate reduced value by Rs4. Our new
PT is still weighted towards RE (52%), followed by power (36%). Given this
skew, an improvement in real estate and power sentiment is key to stock price
revival, while a case for lower holdco discount (currently 20%) could be made
out with clarity on political outcome in state of UP and peaking of interest rates.