| Summary of Contents | STOCK UPDATE Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs183
Current market price: Rs131
Upgraded to Buy Key points -
JP Associate Ltd (JAL) has increased its cement manufacturing capacity by almost 6 million tonne in the year till date (YTD) and the company?s total capacity has reached almost 23 million tonne. Due to the increased capacity and strong demand in its key markets the company?s management is confident of achieving a volume of about 11 million tonne in FY2010 and that much higher growth in FY2011. For M9FY2010 the company has already dispatched 7.3 million metric tonne (MMT) with a growth rate of 35.6% year on year (yoy). For FY2011 we expect the company to post a volume growth of 38%. -
Jaiprakash Power Ventures, a 76% subsidiary of JAL, has raised $200 million (over Rs925 crore) foreign currency convertible bonds (FCCBs) with an upside option of another $100 million. The FCCB issue has a coupon rate of 5% payable on a semi-annual basis. The conversion premium of 16.5% is over the reference price of about Rs74. This bond is for five years and matures on February 13, 2015. JAL plans to utilise the funds raised for capital expenditure (capex) of its power projects and its joint ventures and projects that are being implemented through its subsidiaries. -
Further, JAL is also looking to enter the business of manufacturing and marketing fertilisers either on its own or through a special purpose vehicle (SPV). The new company may be floated with the name Jaypee Industries & Fertilizers. JAL is expected to invest an initial amount of approximately Rs200 crore in the equity. The move will help the company to further diversify its business. However, in the absence of further details we have not done an impact analysis of the proposed foray. -
Jaypee Infratech Ltd (JIL) a subsidiary of JAL, is constructing the 165-kilometre-long six-lane Yamuna Expressway (formerly Taj Expressway) connecting Greater Noida and Agra. To fund its capex plan the company had availed a loan of Rs3,000 crore from ICICI Bank. With the increased activities on the project requiring further funds to the tune of Rs3,700 crore, JIL had approached various banks and infrastructure finance companies and received letters of intent aggregating to Rs4,400 crore. Further, the company has already filed the draft red herring prospectus for the dilution of 15% stake and expects to hit the markets by March 2010. -
We continue to value the stock using the sum-of-the parts (SOTP) valuation methodology and arrive at a value of Rs183 per share. We have valued the cement business at 6x FY2011 enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA), which implies EV/tonne of USD98. We have valued the construction division at 7x EV/EBITDA, which is at around 50% discount to Larsen and Toubro. We continue to value the real estate business at 1x of its net asset value. For the power projects, we have considered the Baspa II, JP Karcham, Vishnuprayag and Nigrie projects in our valuations. In terms of the hotel business, we have valued the same at 7x FY2011 EV/EBITDA. -
As the price target based on our SOTP valuation offers a healthy upside from the current market level we are upgrading our recommendation on the stock from Hold to Buy. At the current market price, the stock is trading at 26.4x FY2010 earnings estimate and 20.1x FY2011 earnings estimate.
VIEWPOINT J Kumar Infraprojects Impetus on skywalks augurs well
J Kumar Infraprojects (J Kumar) is engaged in civil engineering and infrastructure development with primary focus on development of flyovers, skywalks, roads, bridges, airport runways, commercial and residential buildings, railway buildings, sports complexes, and irrigation projects. The company also undertakes the piling of foundation work using hydraulic piling rigs for major real estate and infrastructure companies. The current business activity is concentrated in Maharashtra with the company being most active in Mumbai, Pune, Aurangabad and Vidharbha region for infrastructure projects.
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