Goldman Sachs cuts JP Associates target price by over 55%

Foreign brokerage Goldman Sachs has cut the target price for JP Associates by about 55% on near-term concerns over coal supply and slow growth in cement volumes.

The brokerage has brought its 12-month target price for JP Associates to Rs 37 from Rs 84 earlier, it said in a note to clients.

The trigger for the cut-down in the target price was the sharp fall in the stock price after a 1.45% stake-sale by the group company Jaypee Infra Ventures through block trades between September 1 and 3.

Since September 1, the stock has fallen by 26%. The stock is currently trading down about 3% from Thursday's close at Rs 35.50. 

"Uncertainty also exists on fuel for its cement and power businesses pending the Supreme Court's decision on coal block allocation," said the note authored by analysts Pulkit Patni and Mohit Soni.

Goldman had upgraded the company's stock earlier this year in June. But since the upgrade on June 20, the share price of JP Associates has fallen by 49% while the benchmark Sensex has risen 9%.

Although the stock is trading at 0.6 times the FY16E price-to-book value, the brokerage said that the 2.2% return on equity expected offers little upside for the stock.

"We cut our FY16/17E standalone EPS by 31%/38% (FY15E remains at a loss) on lower cement EBITDA and higher interest expense as we incorporate the higher debt from the FY14 annual report," said the note.

According to the broking firm, the potential upside for the stock could be a sooner-than-expected improvement in the domestic capex cycle and potential asset sales at attractive valuations.

On the other hand, downside risks involve an unfavourable verdict on coal block allocations and potential asset sales at unattractive valuations.