JP Associates: Is a recovery in sight?

The stock has been an underperformer since May 2012 when the company was handed down the penalty and has cracked 36% since then

Jaiprakash Associates (JPA) tanked about nine per cent in Thursday’s trade to Rs 43 on the BSE on reports a bench headed by Chief Justice P Sathasivam had slammed the orders passed by a bench headed by his predecessor, Altamas Kabir. The orders are related to the company depositing a Rs 100-crore penalty.

Deutsche Bank’s downgrade of the counter to ‘sell’ also impacted the sentiment.

In May 2012, the Himachal Pradesh High Court had ordered the company to pay a penalty of Rs 100 crore for violating environmental laws. Also, it was denied permission to set up a 62-megawatt (Mw) captive power plant for its cement division.

According to recent reports, the orders passed by the bench headed by Kabir had helped the company dodge depositing the penalty amount.

“We do not approve of the manner in which the interim orders came to be passed. We do not sit on appeal over orders passed by a coordinate bench. These orders should not have been passed,” a bench comprising Sathasivam and Ranjan Gogoi said on Wednesday, according to reports.

Last month, investors had dumped the stock, as floods in Uttarakhand saw the company shut its 400-Mw hydroelectric power plant. Also, the company had decided not to pursue any further sale of its cement plant in Gujarat.

Deutsche Bank has downgraded the stock to ‘sell’ from ‘hold’ and cut its sum-of-the-parts target price to Rs 42 from Rs 55. The bank said the consolidated debt was above its estimates. It also cut the FY14 earnings estimate 14 per cent and the FY15 estimate nine per cent, citing a high degree of operating leverage in a weak demand environment in the cement sector.

<B>The road ahead</B><BR>
The stock has been an underperformer since May 2012, falling 42 per cent since then, against the 14.5 per cent rise in benchmark indices — the S&P Sensex and the CNX Nifty.

“The recent development is a matter of law and JP Associates has been rightly asked as to why the earlier high court order has not been adhered to. It is not only a question of Rs 100 crore. In the process, the order/observation is a dent on the company’s reputation as well. Having said that, the company can contest the high court order and the payment could still be delayed,” said Daljeet S Kohli, head of research, IndiaNivesh Securities.

Kohli remains bullish on the stock and expects it to touch Rs 74 levels. The cement business should pick up in the second half of this year and aid performance, he says.

A K Prabhakar, senior vice-president (equity research), Anand Rathi, says, “JP Group has exposure to hydro power, which has been facing problems due to the floods in Uttarakhand. Their loan book is also very heavy. The company has been unable to sell any of their units, according to the restructuring plan announced earlier. So, all this is impacting the company and, in turn, the stock.”

In a note in June, Aashiesh Agarwaal and Akshay Rao of Edelweiss Research had suggested they were positive on JPA, largely because of the operating leverage offered by the increasing utilisation of its cement capacity. Additionally, commissioning of the 1,320-Mw Nigrie TPP would provide a boost to its FY15 estimated earnings. They have a ‘buy/sector outperformer’ recommendation/rating on the stock, with a target price of Rs 129 a share.

Deutsche Bank, meanwhile, has downgraded the stock to Sell from Hold and cut its sum-of-the-parts target (SOTP) price to Rs 42 from 55 Rs rupees. The bank said that the company's consolidated debt of Rs 61,200 crore was Rs 10,000 crore above its estimates. It also cut the FY14 earnings estimates by 14% and that of FY15 by 9%, citing a high degree of operating leverage in weak cement demand environment.