Jaypee Infratech -- Wait for better timing :: Macquarie Research,

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Jaypee Infratech
Wait for better timing
Event
 Jaypee Infratech (JPIN) released 1Q FY12 results today. PAT was 6% below
our forecast due to weaker-than-expected sales. Our earnings estimates and
NAV are unchanged. However, we have increased our target discount to NAV
from 30% to 50%. This reflects increased uncertainty from the political
environment in the state of Uttar Pradesh, where JPIN holds all its land bank
and road assets. We maintain our Neutral rating and prefer Prestige Estates
(PEPL IN, Rs110.65, Outperform, TP: Rs210.00), Sobha Developers (SOBHA
IN, Rs233.60, Outperform, TP: Rs430.00), HDIL Housing Development and
Infrastructure (HDIL IN, Rs117.30, Outperform, TP: Rs230.00) and DLF
(DLFU IN, Rs200.90, Outperform, TP: Rs302.00) in the sector.
Impact
 Sales momentum likely to take a hit: Sales momentum had already started
to slow in the last 3 quarters. We remain concerned about the sustainability of
the residential market sales run-rate across the NCR (National Capital
Region). The overhang is caused by shadow inventory held by speculators
that contributed 35-70% of sales in individual projects in FY10 and FY11.
 We therefore continue to expect primary market run-rates to decline by at
least 20% in FY12/13. We think this is likely to be driven by satisfaction of
latent demand and rising borrowing costs. This is likely to be exacerbated by
competition from the secondary market as speculators look to exit property
bought in FY10 and FY11. In the near term, we also highlight the possibility of
delays in land acquisition, execution and the impact on buyer confidence
caused by news flow related to the political environment in the state.
 Margin pressure possible on built-up units: Cost inflation and product mix
are likely to affect margins. This is because pricing power has been affected
by competition from the secondary market as speculators have exited
completed and half-built inventory, which is more attractive than newly
launched projects.
Earnings and target price revision
 No change to our NAV and earnings estimates. We have increased our target
NAV discount from 30% to 50% and cut our target price to Rs43 from Rs63.
Price catalyst
 12-month price target: Rs43.00 based on a Sum of Parts methodology.
 Catalyst: Sales volume and price trend in the NCR over next 6-12 months.
Action and recommendation
 JPIN is trading at a 54% discount to our NAV estimate. This discount is
primarily due to noise related to farmer protests against land acquisition and
litigation related to land parcels near the Yamuna expressway project and
JPIN’s real estate land parcels. Under a normalised scenario, we would
expect this stock to trade at a 20-30% NAV discount. However, in the
prevailing scenario, we expect the stock to remain volatile. We think a 50%
discount seems more appropriate until the political noise dies down. This may
happen closer to the state elections in May 2012, in our view.