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Why pay US$5B, 20x EV/EBITDA for a trading company with nascent
mine development business when you have the following (arguably
cheaper) options – (1) a large cement capacity of 35mtpa and established
hydropower construction business, at US$710MM, 10x EV/EBITDA, and
(2) a well-established power distribution business and nascent BOT project
portfolio, at US$540M, 5.3x EV/EBITDA. The price-value mismatch looks
extremely steep here, and the companies we are referring to are Adani
Enterprises (downgraded to UW, with a revised PT of Rs475),
Jaiprakash Associates (stay Neutral with an eye on potential catalysts,
with a revised PT of Rs76) and Reliance Infrastructure (upgraded to
OW, with a revised PT of Rs575) respectively.
How do we get to the above values? We use residual value approach for
infrastructure conglomerates with significant listed subsidiaries. The
residual value is simply what remains after subtracting the value of the
parent’s stake in listed subs. The residual value is attributable to the unlisted
businesses lodged in the parent, net debt at parent, and holdco discount
(which is subjective).
Why are markets currently differentiating so sharply among the three?
(1) Debt. Adani is levered 1.4:1, while JPA is 4:1 – leverage hurts badly
when borrowing costs are high and rising, and businesses are not doing well.
(2) Adani is generating cash, while JPA and RELI are not, at the consol.
level. (3) Group performance: Adani gets positive rub-off from strong port,
power execution. On the other hand, JPA’s cement profit is falling and
construction profit will be eliminated. For RELI, distribution businesses are
suffering due to inadequate tariff, BOT execution is weak and EPC risks
could be high. (4) Soft issues: JPA has an overhang of UP elections, while
RELI has suffered an ADAG-related overhang since the 2G scam. In the
recent past, Adani has been relatively unblemished, with the exception of
Lokayukta report. (5) Disclosures: JPA’s and RELI’s quarterly accounts are
not transparent on group investments and leverage, while ADE’s are.
Catalysts for change: Macro: A reversal of the interest rate cycle would
benefit leveraged plays (+ JPA), while the less levered ones would hold less
charm (-ADE). Capex cycle pick-up would lead to a revival of cement
volume, prices (+JPA) Policy: Power distribution reforms (+RELI).
Company-specific: Speeding up BOT execution (+RELI); more
transparency (+RELI, JPA). While most of these catalysts are not yet visible,
we think the value differentiation is too sharp and a correction is due.
click on links for company reports:
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Why pay US$5B, 20x EV/EBITDA for a trading company with nascent
mine development business when you have the following (arguably
cheaper) options – (1) a large cement capacity of 35mtpa and established
hydropower construction business, at US$710MM, 10x EV/EBITDA, and
(2) a well-established power distribution business and nascent BOT project
portfolio, at US$540M, 5.3x EV/EBITDA. The price-value mismatch looks
extremely steep here, and the companies we are referring to are Adani
Enterprises (downgraded to UW, with a revised PT of Rs475),
Jaiprakash Associates (stay Neutral with an eye on potential catalysts,
with a revised PT of Rs76) and Reliance Infrastructure (upgraded to
OW, with a revised PT of Rs575) respectively.
How do we get to the above values? We use residual value approach for
infrastructure conglomerates with significant listed subsidiaries. The
residual value is simply what remains after subtracting the value of the
parent’s stake in listed subs. The residual value is attributable to the unlisted
businesses lodged in the parent, net debt at parent, and holdco discount
(which is subjective).
Why are markets currently differentiating so sharply among the three?
(1) Debt. Adani is levered 1.4:1, while JPA is 4:1 – leverage hurts badly
when borrowing costs are high and rising, and businesses are not doing well.
(2) Adani is generating cash, while JPA and RELI are not, at the consol.
level. (3) Group performance: Adani gets positive rub-off from strong port,
power execution. On the other hand, JPA’s cement profit is falling and
construction profit will be eliminated. For RELI, distribution businesses are
suffering due to inadequate tariff, BOT execution is weak and EPC risks
could be high. (4) Soft issues: JPA has an overhang of UP elections, while
RELI has suffered an ADAG-related overhang since the 2G scam. In the
recent past, Adani has been relatively unblemished, with the exception of
Lokayukta report. (5) Disclosures: JPA’s and RELI’s quarterly accounts are
not transparent on group investments and leverage, while ADE’s are.
Catalysts for change: Macro: A reversal of the interest rate cycle would
benefit leveraged plays (+ JPA), while the less levered ones would hold less
charm (-ADE). Capex cycle pick-up would lead to a revival of cement
volume, prices (+JPA) Policy: Power distribution reforms (+RELI).
Company-specific: Speeding up BOT execution (+RELI); more
transparency (+RELI, JPA). While most of these catalysts are not yet visible,
we think the value differentiation is too sharp and a correction is due.
click on links for company reports:
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