buy-jaiprakash associates target 110 research report feb 2009

8/14/2019 Buy-Jaiprakash Associates Target 110 Research Report Feb 2009

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Fairwealth Securities Page

12 February, 2009

IndiaDiversified

Sovid GuptaEquity Analyst: Fairwealth SecuritiesPrivate. Ltd.

Priced on Feb12, 2009

% potential 52%

Target set on 12 Feb09

Market DataBeta 1.75

12M hi/lo 510 / 64

Market cap, INR Millions 86350Shares in issue (mn.) 1,173.8

Reuters JAIA.BO

Bloomberg JPA: IN

Share Holding PatternPromoters 44.44%

MFs 13.0%

FII 21.7%

Others 20.9%

Jaiprakash AssociatesCMP: Rs.73 Target: Rs. 110

We initiate a BUY with a one year target of 114. At CMP of Rs 73, the stock is trading at14x TTM EPS of Rs 5.2 and trailing P/BV of 2. Stock is trading at, trailing P/BV of 2,forward P/E Ratio 9 for (FY10E) and 6 for (FY11E). We recommend the investors to BUYthe stock, with our 12 month price target of Rs 110 providing an upside potential of52%.

Earnings for 2009 are expected to show a modest increase

Strong Q3 09 numbers should allay much of the fears of the investors about companys

future valuations and Earnings potential.

Outlook:

Our Outlook for the stock remains immensely positive considering companys huge orde

book contributing to assured revenues over next 6 years, and huge land bank value which

will unlock in coming years.

Company is going to witness exponential growth in revenues from 4 sectors. i.e. Cemen

(Capacities to triple), Construction(Revenue Growth at 40% CAGR over next 3 years), Rea

Estate and Hotels( We expect EBITDA to increase from 8% in Q3 to around 30% in 3

years), and Power(3000 MW capacity addition over next 6 years expected)

Restructuring Highlights:

Jaiprakash Associates (JPA) under flagship of Jaypee Group has decided to acquire fourCompanies and merged into JPA. The companies are as under:-

Jaypee Hotels Ltd (JPH) Jaypee Cements Ltd (JPC) Gujarat Anjan Cements Ltd (GAC) Jaiprakash Enterprises Ltd (JEL)

As per the scheme of the merger, the swap ratio will be 1:1 for JHL, 1:10 for JCL, 3:1 foJEL, and 1:11 for GACL. Since the Company is planning to transfer the cross-holding to atrust instead of cancelling it, it is likely to issue 220 million new shares, which will result inthe dilution of earnings.

After acquisition of four companies by JPA as stated herein above, 22.04 crore shares o

JPA of Rs.44.08 crores would be issued. As a result equity dilution will rise by 18.77% fromRs. 234.76 crores to Rs.278.84 crores.Of 22.04 crore new shares of JPA being issued, 10.60 crore shares would get parked inTrust, while 11.44 crore shares would get issued to non-JPA shareholders.

Our take on this step is positive as it will help company in raising more funds as thecompany has huge line up of projects. Company definitely needs to raise Equity and bringdown Debt Equity levels to a more suitable level of 2:1.


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Jaiprakash Associates - Buy

Higher revenues and lower margins forthe construction and cement business.

Increased contribution from real estateprojects.

Result Round up:

Increase in Top line by 47%. Cement and Construction margins down.

Sales jumped to Rs. 1321.69 crore. Revenues from Real Estate sector increased by 150%

q-o-q. Cement sales grew 11%. Margins however, were trimmed by 606 bps from 24.76% t

18.71%.

Construction revenues grew by 71% with increased margins from the Baglihar project to the

tune of 350 bps and huge dilution of 700 bps, due to lower margins from Taj Yamuna

Express way.

Tempered by falling margins, Operating Profit rose to Rs. 247.26 cr (+10.97 % Y-o-Y). After

providing for interest, the company generated cash profit before depreciation Rs. 273.52

Crore.

Achievements (FY07-FY08):

Engineering and Construction Participated in 54% of hydropower projects in the 10th Five Year Plan. Built largest underground surface powerhouse. Following Projects with power generation capacity of 1,030 MW completed durin

2007-08:a. Teesta-V Hydro-electric Project (510 MW) in Sikkim.b. Omkareshwar Hydro-electric Project (520 MW) in Madhya Pradesh.

Cement To be a 30 Million Ton Per Annum cement producer by 2011.

Power

India's largest private sector hydropower producer. Slated to be a 4270 MW power entity by 2013.

Real Estate & Expressway

Constructing 165 km Noida - Agra, Yamuna Expressway.

Constructing 1047 km Noida - Ballia, Ganga Expressway.

Real Estate Development rights for over 37 million square feet.

Industry Potential

Company gets all its revenues from Sunrise sectors like Infrastructure, Real Estate an

Power. Although marred by recession country is still likely to witness more than 6% growt

over next 10 years, which will add around 1 trillion dollars to Indian GDP.

Installed capacity of the cement industry is expected to increase to 219 MTPA by financiyear 2009 from 198.62 MTPA in the financial year 2008. It will further go up to 241 MTPby the financial year 2010, according to an ICRA Industry Monitor report.We expect strong showing by cement companies although with lower realization

continuous growth in Infrastructure as 4 lane and above highway development remains

priority sector for both UPA and NDA governments. And hydel power development remain

another major priority considering Indias potential of 150,000 MW of Hydel capacity an

efforts to keep Thermal to Hydel ratio of 60:40.


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Company Description:

Jaiprakash Associates Limited is Indias leading Engineering and ConstructioCompany and fourth largest cement manufacturer with strong focus on development oRiver Valley and Hydro Electric Projects.

The company's business can be broadly classified in the following sectors:

1. Engineering & Construction2. Cement3. Energy (Power, Oil & Gas)4. Real Estate and Expressways5. Hospitality

Cement Division:

The cement segment contributes around 40% to the standalone net revenues o

the Company. Jaiprakash Associates has a total installed capacity of 11.5 MTP(FY08), and as per the management, more than 4 MTPA of new capacity is expected tbe commissioned in the next 23 months..The cement revenue was driven by volumgrowth of 15% on account of commissioning of 2 MTPA plant in MP and ramp up aearlier commissioned capacities in Uttar Pradesh and a grinding unit at Haryana. Witthis addition of new capacity the total production capacity will be ~18 MMTPACompany plans to raise capacities to up to 25 MTPA by 2010 and to furtheexpand it to 30 MTPA by 2011. Company is developing its captive power units in moof the cement plants to reduce costs. JAL has so far commissioned captive thermapower plants with an aggregate capacity of 88.50 MW.

Company has also procured coal blocks in Madhya Pradesh to meet its captive powerequirement for future capacity expansion in Cement division.

.

Engineering and Construction Division:

Given the robust growth of the Indian economy, investment in the roads and bridgesector, during the Eleventh Plan is projected at US$ 78.5 billion over the five-yeaperiod starting from 2007-08.

Construction work on Yamuna Expressway project is in progress and the project schedules to be completed by 2010. On the revenue growth of 71% the constructiodivision recorded pre-exceptional EBIT growth of 111% (EBIT of Rs922 mn). The EBmargins for the construction division (excluding severance pay to workers of BagilhaProject) improved by 350 bps yoy from 14.7% to 19% on account of strong execution oprojects like Karchamwangtoo which is witnessing the peak of its execution.

However the same fell by a massive 1300 bps Q-o-Q due to increased share revenues from Taj Expressway where margins are lower compared to compleconstruction projects.


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EBIDTA margins for the Engineering andConstruction sector is significantly lower,especially in projects which do not requiremuch capital outlay as well as in those projectswhich are of comparatively low value.

Consequently E&C division witnessedlower margins for Q309 as revenuecontribution from Taj Expresswayincreased.

Company has assured land developmentrights for 37 million square feet in Noida,Greater Noida, along with other places

between Agra and Greater Noida. Separateindependent valuations have valued theselands at over 2 billion USD. This does notinclude additional land development rightcompany will earn through Ganga Expresswayproject.

Real Estate Segment:

Company won the 6 Lane 160 KM Taj Expressway project, through which it got 2million square feet of Land Development rights at 5 locations between Noida and Agr

Most of the land that company got was at 2003 rates. Rates since then have increasemanifold.

Company also has real estate comprising of residential, commercial and institutiondevelopment spread across 452 acres of land in Greater Noida, Uttar Pradesh, India.

Company also got rights to develop part of 1047 KM 8 lane Ganga Express way, whicwill give company to develop part of 30000 acres total entailed for development.

Energy Segment:

JAL is developing India's largest BOO Hydro power project --- the 1,000 MW KarchamWantoo project in Himachal Pradesh, which is expected to be commissioned by 201This will increase the Companys hydro power operating assets to 1,700 MW, Companplans to scale up its total Hydel Power capacity under BOOT model to up to 500

MW(2500 MW in Arunachal Pradesh and 700 MW in Meghalaya, along with 170mentioned already).

Hospitality:

Company operates 3 five star properties and also manages 2 other properties whicare owned by the company. During the yaer 2007-08 the compnany achieved thturnover of Rs. 172.91 Crores as compared to Rs. 130.80 Crores in previous yeregistering the growth of 32%. The Net profit for the year was registered at Rs. 17.5Crores vis-a-vis Rs. 13.64 Crores in previous year.

Future EstimatesFuture EstimatesFuture EstimatesFuture Estimates

Net Sales

(RS. Crores)

PAT

(Rs. Crores)

EPS P/E

FY07 4,149 566 4.04 18.55

FY08 4,455 690 4.93 15.22

FY09 5,740 730 5.21 14.38

FY10 8,500 1,100 7.86 9.55

FY11 13,000 1,650 11.81 6.30

Source: Fairwealth Securities Research Estimates


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Cement and Construction contributed to 90% ofthe firms standalone revenues while RealEstate, Wind Power and other divisionscontributed remaining 10%.(See Table below)

Source: Company Report

Cement segment contributed to 45% of EBIT,though sharply down from ~55% for the samequarter last year, margins for the business saw

a huge 630 bps drop. Construction segmentbusiness saw increase in margins decline dueto lower margins from Taj Express way project.

Note: Segmental Numbers may not add up to

combined results, these are only approximations.

Source: Company Report

Segmental Revenues-Stand Alone(Rs. Crores)

Q3FY09 Q3 FY08 Growth(%))

Cement 577.3 500.4 15.4%

Construction 751.7 440.3 70.7%

Real 66.4 - NA

Total 1395.4 940.7 48.3%

EBIT (Rs. Crores)

Q3FY09 Q3FY08 Growth(%)

Cement 155.2 165.9 -6.4%

Construction

91.9 64.8 41.8%

Real 27.2 - NA

Total 344.1 290.6 18.9%

EBIT Margins(%)

Cement 26.9% 33.2%

Construction 12.2% 14.7%

Real Estate 41.0% NA

Total 19.7% 24.5%

Results Round up:Results Round up:Results Round up:Results Round up:

SEGMENT RESULTS Consolidated (Inc. Minority Share Holding)Quarterly Revenues(Rs. Crores PBIT(Rs. Crore)

Segments 200812 200712 Var (%) 200812 200712 Var (%)

Sales

Cement 577.33 500.39 15.38 155.16 165.88 -6.4

Construction 751.7 440.32 70.72 91.94 64.82 41.8

Hotel 7.31 8.46 -13.59 1.28 1.11 15.3

Hospitality 0 0 0 0 0

Hydro Electric

& Wind Power

3.66 1.01 262.38 2.09 0.16 1206

Real Estate 66.43 0 0 27.23 0

Investment 66.49 58.69 13.29 66.49 58.69 13.2

TOTAL 1472.9 1008.9 46 344.19 290.66 18.4

Source: Capital Line, Company Reports.

PBIT Margin (%) ROCE(%)

Cement 26.88 33.15 -18.91 2.07 3.31 -37.46

Construction 12.23 14.72 -16.92 6.04 7.23 -16.46

Hotel 17.51 13.12 33.46 0.52 0.93 -44.09

Hospitality 0 0 0 0 0 0Hydro Electric & WindPower

57.1 15.84 260.48 0.87 0.16443.7

5Real Estate 40.99 0 0 6.7 0 0

Investment 100 100 0 1.76 2.27 -22.47

TOTAL 23.37 28.81 -18.88 2.51 3.18 -21.07Source: Capital Line, Company Reports.

Although PBIT Margins for Cement segments were 27% versus 13% for Constructionbut ROCE was 2%, versus 6% for Construction business.

Reason for such mismatch is low capital expenditures in Construction projects athere are is low capital expenditures in Construction projects and huge capitrequirements in Cement segment as capacity is being increased from 11.5 MTPA FY08 to 25 MTPA by FY10E.


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Cement:

Downward margin pressure onaccount of additional capacities andlower price realisations.

Construction:

Lower margins pressure on accountof low margins in highway projects

Key Risks:Key Risks:Key Risks:Key Risks:

Highly leveraged balance sheet to adversely affect funding.On a consolidated basis company had Debt to Equity Ratio of 2.3 in FY08, which expected to reach to a high of 2.8 by FY10. Also most of the funds to be raised furthewould be at higher interest rates from Indian Banks/ Institutions.However much of the companys Debt (around 1600 crores), maturing in 2012 is form of convertible Debenture and Warrants, convertible at Rs. 270, which will lowcompanys Debt Equity Ratio. We do not see share prices rising to those levels beforH2 2010.

Expiry of Cheaper Debt Funding in FY12The company shall face much problems in arranging low cost funds as at present fundfrom FCCB are at less than 4%In case the conversion does not happen, problems are going to multiply as these ar

very cheap debt funding of less than 4% PA, and company will face difficulty in raisincheap funding or in cases where Government regulations against ECB hampecompanys growth potential.

Political Factors and Higher Business/ Unsystematic Risks:Various political factors in state of Uttar Pradesh can immensely hamper companygrowth projections and valuations as all the land bank is in that state and we put highebusiness risks attached to Real Estate business in state of Uttar Pradesh.Also a lot of construction and Cement plants of the company are in same state, sinvestors need to keep an eye on that too.

Weak business environment:

Most of the companys turnover comes from Cement, Construction, Real Estate anHospitality business, all of which are highly capital intensive projects and are worst has credit crunch has hit these factors adversely from the supply as well as the demanside.

Source: Capital Line

Stock Price of the company has fallen by 80%over last year, while S&P Nifty has fallen aroun50% at its current price.

We estimate diverse nature of Companybusiness will help the company to whether thcurrent downturn.

Strong Q3 09 numbers should allay much of thfears of the investors about companys futurvaluations and Earnings potential.


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Value lies in Top Line Growth and Assets

Top line growth of 40% CAGR expected.

Margins to remain at similar levels.

Higher Revenue contribution from highmargin Real Estate business, will act as asupport to falling margins and bottom line.

Shareholding pattern: Jaiprakash Associates

Source: Company Reports, NSE.

Shareholding pattern has remained more or lessunchanged.

Investment RationalInvestment RationalInvestment RationalInvestment Rational

Cement:

Company plans to increase Cement capacity by 2.5 x from FY08 levels, which will lead t

more than 100% rise in revenues by FY11E. Similar expansion is envisaged by sever

other players across the industry, while the supply will grow at more than 20%, deman

will grow much slower as recession fears loom large. We expect cement prices to fall fro

these levels, leading to lower margins. Long term margins for the business will settle

around 20%.

Real Estate:

Real Estate segment had high margins of 41%, segmental revenues were mere 8%, an

going forward increase in segmental revenues will increase overall profitability for thbusiness.

Company has two major real Estate projects.

8mn sq. ft development at JP Greens-Noida.

6250 acres of land bank along Taj Expressway.

PowerCompany has been the biggest hydropower player in the country, and has operated a

significant higher margins. EBITDA margins stood at 35% in FY08 compared to 16% i

FY06.

BOOT power projects comprise 1700 MW. Company is expected to raise total capacity

5000 MW Hydel (additional capacities to be commissioned by 2014).

Construction:

Expressway: Taj Expressway and Ganga valley projects will be hug

contributors.

Hydro power: Combined order book of 2100 MW could add Rs. 8400 crores t

order book.

Irrigation: JP Associates won an order of Rs. 1950 crores. For 51 Km. lon

tunnel.

Real Estate: Intersegment orders from Real Estate business would b

significant contributor to this division.


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Annexure:Annexure:Annexure:Annexure:

1. Income Statement:

PROGRESS AT A GLANCE OF LAST 5 YEARS(Rs. Crores)

200803 (12) 200703 (12) 200603 (12) 200503 (12)

Net Sales 4194.45 3930.62 3269.35 2997.75

Other Income 273.91 144.79 549.57 97.3

Total Income 4455.36 4149.51 3798.57 3145.11

Total Expenditure 2441.9 2504.23 2341.17 2143.39

Operating Profit 2013.46 1645.28 1457.4 1001.72

Interest 601.55 496.95 397.13 422.56

Gross Profit 1411.91 1148.33 1060.27 579.16

Depreciation 318.83 259.57 214.88 235.15

Profit Before Tax 1093.08 888.76 845.39 344.01

Total Tax 296.13 247.28 150.06 137.32

Net Profit before MinorityInterest

796.95 641.48 695.33 206.69

Minority Interest 120.15 88.22 60.67 0

Net Profit after Minority Interest 676.8 553.26 634.66 206.69

Extraordinary Items -12.72 -12.85 297.31 3.14

Adjusted Net Profit 689.52 566.11 337.35 203.55

EPS Adjusted 6 6 6 2

EPS Adjusted(after minority Int) 5.34 4.87 5.81 2.21Source: Company Report, Capital Line

Company has not shown any significant Sales and Earnings jump up to 2008, with top line showing 11% CAGR.Bottom line has risen exponentially at a rate of 56% compounded annually.


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Fairwealth Securities Page 1


2. Cash Flow Statement:

Cash Flow Summary(Rs. Crore)

200803 200703 200603 200503

Cash and Cash Equivalents at Beginning ofthe year 1823.0 1847.0 821.8 266.

Net Cash from Operating Activities 912.3 1099.6 218.1 261.

Cash Flow From Operating Activities

Net Profit before Tax & Extraordinary Items 1093.1 888.8 469.1 344.1

Adjustment For

Depreciation 318.8 259.6 141.3 235.2

Interest (Net) 460.6 402.2 299.6 330.4

Others 9.8 17 11.6 53.8Total Adjustments (PBT & Extraordinary

Items) 789.0 678.5 452.3 503.0

Op. Profit before Working Capital Changes 1882.0 1567.3 921.5 847.0

Working Capital Adjustments -749.8 -226.9 -558.4 536.8

Cash Generated from/(used in) Operations 1132.2 1340.4 363.1 310.3

Direct Taxes Paid -220.0 -240.8 -144.9 -48.9

Total-others -220.0 -240.8 -144.9 -48.9

Cash Flow before Extraordinary Items 912.3 1099.6 218.1 261.4

Net Cash Used in Investing Activities 4656.4 2411.2 -540.0 597.

Cash Flow from Investing Activities

Purchase and Sale of Fixed Assets 4690.3 2523.8 1021.5 653.1Purchase and Sale of Investments -112.6 -3.1 395.3 10.2

Interest Received 97.3 56.5 42.8 11.4

Others 49.0 58.9 43.3 33.9

Net Cash Used in Financing Activities 4383.3 1287.5 1347.1 891.

Cash Flow From Financing Activities

Proceeds:

Proceeds from Issue of shares (incl sharepremium) 1202.9 98.8 330.0 436.3

Proceed from 0ther Long Term Borrowings 3403.6 1725.2 1204.0 963.9

Dividend Paid -176.2 -81.4 -105.9 -32.2

Interest Paid -557.9 -458.7 -342.4 341.8Others 510.9 3.6 261.4 135.0

Net Cash Used in Financing Activities 4383.3 1287.5 1347.1 891.2

Net Inc/(Dec) in Cash and Cash Equivalent 639.2 -24.1 1025.2 555.Cash and Cash Equivalents at End of theyear 2462.2 1823.0 1847.0 821.

Source: Company Report, Capital Line


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3. Balance Sheet:

Balance Sheet Summary (Rs. Crore)

200803 200703 200603 200503

SOURCES OF FUNDS :

Share Capital 234.3 219.2 215.1 176.2

Reserves Total 4344.4 2709.3 2390.8 989.8

Total Shareholders Funds 4578.7 2928.6 2605.8 1166.0

Minority Interest 702.5 459.1 377.1 33.7

Secured Loans 7796.7 6251.2 4854.1 4345.0

Non Convertible Debentures 796.3 830.0 1240.0 1516.3

Term Loans Total 6757.1 5082.5 3394.3 2612.3

Other/Misc 243.3 338.0 217.1 209.1

Unsecured Loans 3786.6 1879.4 1540.3 684.6

Debentures / Bonds 2816.9 1356.8 1010.9 436.3

Deffered Tax and Liabilities 111.9 68.1 47.0 38.9

Unsecured Loans Others 667.7 313.7 390.9 158.4

Total Debt 11583.2 8130.6 6394.3 5029.5

Total Liabilities 16864.5 11518.2 9377.2 6229.2

APPLICATION OF FUNDS :

Gross Block 8822.3 7709.0 5671.1 5089.1

Less: Accumulated Depreciation 1883.5 1591.7 1411.0 1285.0

Net Block 6938.8 6117.2 4260.1 3804.1

Capital Work in Progress 6225.0 2697.1 2311.4 1196.0

Investments 120.3 7.7 4.6 23.5

Current Assets, Loans & AdvancesInventories 1436.0 1203.7 1226.0 632.4

Sundry Debtors 771.7 741.6 575.9 517.0

Cash and Bank 2462.2 1823.0 1847.0 821.8

Loans and Advances 2721.2 1307.7 973.3 898.0

Total Current Assets 7391.0 5076.0 4622.2 2869.2Less : Current Liabilities andProvisions

Current Liabilities 2767.2 1477.3 1109.4 1022.0

Provisions 481.4 405.0 245.6 192.2

Total Current Liabilities 3248.6 1882.3 1355.1 1214.2

Net Current Assets 4142.4 3193.6 3267.2 1655.0

Miscellaneous Expenses notwritten off 37.4 25.9 50.7 62.2

Net Deferred Tax -599.5 -523.3 -516.8 -511.6

Total Assets 16864.5 11518.2 9377.2 6229.2

Contingent Liabilities 2022.2 1781.2 1914.5 1570.1

Source: Company Report, Capital Line


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Disclaimer

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While

the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before makingany investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained inthe reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide informationupdates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment AdvisoryServices. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale

Thereof while this report is in circulation.

buy-jaiprakash associates target 110 research report feb 2009

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