Monetises two cement plants in MP… Jaiprakash Associates :: ICICI Securities, report link

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Monetises two cement plants in MP…
Jaiprakash Associates (JAL) has signed an MoU to sell two cement plants
in Madhya Pradesh to UltraTech Cement. The deal includes two
integrated units with 5.2 million tonnes per annum (MTPA) clinker
capacity and 4.9 MTPA grinding capacity along with 180 MW captive
thermal power plants (CPP) at an EV of | 5400 crore. While the deal
implies EV/tonne of US$135/tonne on expanded capacity (please refer
details below), the deal is likely to help JAL reduce its standalone debt of
~| 28,000 crore and consolidated debt of | 70,400 crore. Nonetheless, we
wait to see a debt reduction and improvement in operation performance
post asset monetisation. Hence, we maintain our HOLD recommendation
on the stock with an SOTP based target price of | 28/share.
Another cement asset sale as part of JAL’s strategy…
JAL has announced that its board has approved the MoU to sell two
cement plants in Madhya Pradesh to UltraTech Cement, a deal that will
help JAL reduce its standalone debt of ~| 28,000 crore and consolidated
debt of ~| 70,400 crore. The assets include (a) integrated cement plant
with clinker capacity of 2.1 MTPA and grinding capacity of 2.6 MTPA and
25 MW CPP at Bela, Madhya Pradesh. and (b) integrated cement plant
with clinker capacity of 3.1 MTPA and grinding capacity of 2.3 MTPA and
155 MW CPP at Sidhi, MP.
Deal done at EV of | 5400 crore…
The MoU between JAL and UltraTech has been done at an EV of | 5400
crore, which implies apparent EV/tonne of ~US$180/tonne on total
grinding capacity of 4.9 MTPA. However, we highlight that the deal
includes surplus clinker (~1.7 MTPA) and captive power capacity (~135
MW), which means grinding capacity can be expanded by ~2.4 MTPA to
7.3 MTPA at minimal capex. Hence, on expanded capacity, EV/tonne
works out to ~US$135/tonne, which is below its replacement cost of
US$150/tonne.
Asset monetisation spree…
JAL has been looking to pare assets as part of the strategy to de-leverage
the balance sheet. While JAL remains the third-largest cement
manufacturer in India with cement capacity of ~20 MTPA, it has cut its
size by more than a third since last year. The Jaypee Group had been
selling other assets also and recently signed a deal to sell two of the three
hydroelectric projects of Jaiprakash Power Ventures (JPVL) in Himachal
Pradesh to Sajjan Jindal-led JSW Energy at an EV of about | 9,700 crore.
Credit rating downgrade to increase pain further…
On the basis of a review of the operational and financial performance of
JAL for FY14 and H1FY15, CARE has downgraded the rating for both long
term and short term bank facilities. Now, a bank rating downgrade would
further increase their cost of debt. In turn, this would put more stress on
their cash flows.
Hold till clarity emerges…
It has been seen in the past that due to regulatory concerns JAL’s asset
monetisation and consequent debt reduction plans have been delayed.
Hence, we would like to wait further till the planned asset monetisation
fructifies into debt reduction and improvement in earnings. Hence, we
recommend HOLD on the stock with a revised SOTP based target price of
| 28/share (refer exhibit 1 for more details on valuation)

LINK
http://content.icicidirect.com/mailimages/IDirect_JPAssociates_CoUpdate_Dec14.pdf