| | STOCK UPDATE Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs105
Current market price: Rs67 Price target revised to Rs105 Result highlights -
Earnings ahead of estimate: Jaiprakash Associates Ltd (JAL) on a stand-alone basis posted a net profit of Rs128.7 crore (an increase of 11.4% year on year [YoY]), which was well ahead of our as well as the Street's expectations on account of much higher than expected profitability in its construction division and a higher than expected other income. However, the cement division disappointed with a loss at the EBIT level; its real estate division's performance was also below expectation due to the slowdown in the property market. -
Overall revenue supported by cement division: JAL's revenues improved by 2.5% YoY to Rs3,067 crore in Q2FY2012. The overall revenue of the company was supported by its cement division, which posted a revenue growth of 9.6% YoY (driven by a volume growth of 18.8% as the realisation declined by 7.8% in the same period). Its construction division's revenue even though declined by 1% YoY the same at Rs1,555 crore was higher than our estimate. However, on account of the slowdown in the property market its real estate division posted a 37.6% decline in its revenue. -
OPM contracts due to loss in the cement division: The operating profit margin (OPM) contracted by 81 basis points YoY to 22.3% in Q2FY2012 on account of the cement division, which posted a loss to the tune of Rs29 crore on account of cost push and higher than expected pressure on cement realisation. However, the negative impact of the disappointing performance of the cement division was largely offset by a surge in the EBIT (in percentage terms) of the construction division by over 15 percentage points YoY to 36.1%. Consequently, the operating profit declined by 1.1% to R683 crore. -
SOTP valuation: We have re-visited our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected cost pressure in the cement division and the better than expected profitability of its construction division. Consequently, the revised EPS estimates for FY2012 and FY2013 work out to Rs3.1 and Rs4.2.
We continue to like JAL due to its diversified business model and aggressive expansion plan. However, the huge cost pressure in the cement division and the fluctuating profitability of the construction division will be the key risks. In terms of valuation we continue to value the stock using the SOTP valuation methodology. We have valued the cement business at 6x FY2012 EV/EBITDA. We have valued the construction division at 6x EV/EBITDA. We continue to value the real estate business at 1x its net asset value. For power projects, we have considered those projects in our valuations that are either operational or financially closed. In terms of the hotel business, we have valued the same at 7x FY2012 EV/EBITDA. The fair value based on the SOTP method works out to Rs105 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs105. At the current market price, the stock is trading at a PE of 21.7x FY2012 and 15.8x FY2013 earnings estimates. Phillips Carbon Black
Cluster: Cannonball
Recommendation: Buy
Price target: Rs173
Current market price: Rs117 Price target revised to Rs173 Result highlights -
Sales grew on better realisation but volume performance was poor: The net sales of Philips Carbon Black Ltd (PCBL) grew by 35% year on year (YoY), supported by a 27% growth in the realisation of carbon black. However, the performance on the volume front was poor. The volume grew by 7% YoY (new capacity was added over the previous year) but declined by 8% sequentially, indicating a poor demand. We observed that the company has cut production compared to the Q1FY2012 levels and there was a significant rise in its inventory in H1FY2012. Both indicate a lower demand outlook. The sales from the power segment remained healthy with a 23% growth YoY but slipped by 18% quarter on quarter (QoQ). -
Profitability hit by margin pressure: The operating profit margin (OPM) for Q2FY2012 slipped to 8.2% compared to the historical trend of 12-13%. One of the highlights of the cost was a large foreign exchange (forex) fluctuation loss of Rs10 crore (PCBL has foreign debt) due to the rupee's depreciation. Even if we adjust this expense (as the same is notional in nature), the OPM appears to be around 10%, which is still lower. Moreover, the employee cost was reported high in this quarter compared to the previous quarter due to a variable payment made by the company (historical data suggests the trend). Consequently, the operating profit declined by 9% YoY despite a 35% sales growth. Sequentially, on flat sales the operating profit declined by a whopping 40%. -
Valuation and outlook: Given the apparent slowdown in the domestic demand, the company is likely to witness several challenges in the medium term. Moreover, a higher interest rate coupled with the depreciating rupee could further be challenging for the company for some time. Hence, we have cut our earnings estimates by 13% and 11% for FY2012 and FY2013 respectively. As a result, we have reduced our price target to Rs173 from Rs205, considering the likely headwinds the company is expected to face in the medium term. Nevertheless, we remain positive on the stock from a longer-term perspective given its leadership position in the growing Indian market and the stock's low valuation. At the current market price, the stock trades at 0.6x its FY2012E BV and 0.5x its FY2013E BV. It is available at 3x its FY2012 and FY2013 earnings estimates. Therefore, we retain our Buy rating on the stock with a revised price target of Rs173. | | "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." | |
