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Jaiprakash Associates: Positive news priced in

Though the company is doing all the right things, some issues still need to be addressed

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While are struggling to see upsides on the bourses, has surpassed these returning almost 60 per cent since the start of September. The stock has doubled in calendar 2012 till date and recently touched its 52-week high of Rs 106.7 on Wednesday, thanks to its plans of hiving off two cement plants and looking for a strategic stake sale. Recently, it also achieved a key milestone with forest clearance of (North) mine, which will cater to 50 per cent of coal requirements of its 1,320 Mw (which accounts for 30 per cent of the sum-of-parts valuation estimated by analysts).

However, analysts feel the market has over-reacted to the announcements and the company has become the most expensive infrastructure stock after L&T, based on EV/Ebitda. A valuation of 10 times FY13 enterprise value (EV) to estimated operating profit does not factor in some concerns, which still need to be addressed. Even based on the sum-of-parts valuation, it is trading close to its fair value.

Moving in the right direction
In FY12, 57 per cent of Jaiprakash Associates’ consolidated operating profit went in fulfilling interest payments, thanks to a gigantic debt of Rs 53,000 crore. Stake sale of cement units will help in reducing debt considerably and hence the news has led to a rally in the stock. It is also reportedly in an advanced stage of negotiations for sale of the Gujarat plant (capacity of 4.8 million tonne a year) and the deal worth around $800 million (roughly Rs 4,400 crore) could be announced any time soon. On the other hand, with the company getting forest clearance, it will now be able to start production at the 2.5-million tonnes a year Amelia (North) coal block in January 2013. Says an analyst from , “Lack of final clearances for the captive mines at Nigrie project was a key overhangs.”
 

DELEVERAGING BENEFITS
Consolidated Rs crore FY12 FY13E FY14E
Revenues 14,875.0 18,442.0 21,875.0
% change y-o-y 28.1 24.0 18.6
Operating profit 5,466.5 6,802.0 8,053.0
% change y-o-y 7.4 24.4 18.4
Net profit 633.0 1,055.0 1,354.0
% change y-o-y -51.1 66.7 28.3
E: Estimates                                                               Source: Company, Bloomberg
 
SUM-OF-PARTS VALUATION
Rs/share  HDFC
Securities
Elara
Capital
Cement  75.9 73.7
Construction 32.5 32.9
Real estate 9.0 8.8
Others 14.4 19.9
Jaypee Infratech 29.2 23.8
Jaiprakash Power 
Ventures
29.4 29.9
Jaypee Cement Corp 17.2 13.4
Net debt -100.0 -95.4
Total 107.9 107.0
HDFC Securities report dated Dec 10; Elara Capital report dated Dec 12

Concerns still exist
Though its two cement units in Gujarat and have been de-merged into a 100 per cent subsidiary, the company is not planning to sell the Andhra unit (five million tonnes a year) now. This will delay the debt reduction process, say analysts. The company’s negotiations with three buyers in the past have fallen through. Even for the Gujarat plant, , chairman of the company, recently said the company will exit only if the valuation is comfortable. If the ongoing talks fail again, it will be a disappointment.

Meanwhile, the company’s construction business provides limited visibility of revenue growth (from medium-term perspective), as two of its large projects (Yamuna Expressway and hydro project Karcham Wangtoo) are already commissioned, while third-party order inflow remains weak. Hydroelectric projects formed 80 per cent of its Rs 5,200-crore order book in Q2FY13 but execution of these projects takes a long time.

Its infrastructure and real estate subsidiary, Jaypee Infratech, is stressed due to higher interest and depreciation costs of Yamuna Expressway, which opened in August this year. However, the six-laning of the NH2 would provide motorists with another alternative. Though Jaiprakash has been able to sell 30 per cent of the total 162 million sq ft of land (development rights), real estate remains sluggish.

In power, Jaiprakash is doing quite well. Clearance to Amelia mines is positive and will help towards commissioning of Nigrie power plant. However, the 2.9-million tonnes Dongri Tal-II coal mine is yet to receive forest clearance and is equally essential for this project.

The company’s consolidated debt to equity ratio stood at four times in FY12, which needs to be brought down for the stock to continue its outperformance and command premium valuation. While improvement in operating cash flows after the commissioning of the Yamuna Expressway and Karcham Wangtoo will help, the power business needs to arrange for funds to repay non-convertible debentures worth Rs 1,450 crore due in February 2013.

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