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Jaiprakash Associates (JAIA.BO, Neutral)
Managing debt will be difficult if new project execution remains slow; we maintain our Neutral rating
on Jaiprakash Associates (JPA) given the risks despite substantial stock price correction
Exposure to growth areas of infrastructure and strong line up of new projects gives good visibility on future sales:
Power: About 4,000 MW to be added by the end of FY13; 700 MW currently operational; Karcham Wangtoo
(1,000 MW) started first unit in May 2011.
Cement: 26.2 MT operational, a further 9.7 MT planned for FY12.
Roads & Real Estate: 165km BOT to become operational by early 2012, adjoining real estate of about 500mn
sq. ft. under development (expected to be sold over the next 18 years).
JPA’s sports city (Rs1,400cr project) opening and hosting F1 race in October 2011.
However, high leverage has been a concern especially in a rising interest rate scenario:
Construction work has been delayed for the company’s thermal power plant projects due to local land
acquisition issues – if the commissioning of these projects gets delayed, it would put further pressure on its
balance sheet as the interest on outstanding debt on these projects would continue to get capitalized.
We remain concerned about the already high leverage which seems excessive even when we factor in the
scale of these new projects being planned across various business segments.
Valuation
We maintain our Neutral rating on JPA but lower our EPS estimates by 26%-28% on the back of lower E&C
segment revenue (predicated on project work delays as discussed above) and a higher interest expense
outflow. We also lower our 12-month SOTP-based target price to Rs67 (from Rs106) based on: (1) Rolling
forward our multiple estimates to the average of FY12E-FY13E. (2) Reducing EV/EBITDA multiple on the E&C
business to 6X from 8X – in line with the target multiple for other construction sector peers. (3) Adjusting the
value on JP Power Ventures based on current market price and valuing JP Infratech based on a 20% discount
to NAV. (4) Incorporating higher debt on the base business, as reported by the company in its full-year
consolidated results for FY11.
JPA trades at 16.5X FY12E P/E and 1.3X P/B vs. its historical 5-year median of 19.5X and 2.9X.
Key risks
Upside: (1) Improved realizations on cement, and (2) faster execution in power and real estate projects.
Downside: (1) Difficulty in fund raising for planned future projects, and (2) volatile raw material prices.
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