Jaiprakash Associates: The worst seems over

The company is expected to have positive cash flows as a number of its projects go on-stream

Even if the market has been discounting Jaiprakash Associates, the promoter group has been buying its stock through the fall in the markets. While this speaks volumes about the promoter’s faith in the company, the markets look at the cash flows. For the last five years, the company has been weighed down by high capital expenditure across all businesses.

According to a report by CLSA, it is set to change, helped by a 90 per cent rise in cement capacity over FY10-13 and resilient real estate sales in the parent company and its subsidiary, Jaypee Infratech (JIT). Key projects like Jaypee Infra’s Yamuna Expressway toll road and 1,500 Mw of extra power capacity in subsidiary Jaiprakash Power will go on-stream by Q4 of FY12.

A trebling of cement production over FY10-14 may offset lower construction revenue, rising depreciation and interest expenses. CLSA expects consolidated profit to rise sixfold over this period. However, with the 1,000-Mw Karcham hydropower project starting from March 2011, capacity of Jaiprakash Power will expand from 700 Mw now to 7,480 Mw by March 2015.

A strong ramp-up in cement Ebitda (Earnings before interest, taxes, depreciation and amortisation) will mesh with falling capital expenditure, allowing Jaiprakash Associates to turn free cashflow (FCF) positive by 2012-13. Analysts expect that with JPVL still executing projects, consolidated net debt will double by 2013-14, but long-term offtake agreements — commissioning of Karcham and Bina power projects and JPVL’s equity raising — will mitigate risks. Healthy customer inflows and strong FCF at JIT are also tailwinds.

Some brokerages have re-rated the stock as they believe that completion of its cement projects, commissioning of Karcham power project, strong infrastructure cashflow, JPVL’s equity raising and rising operating cashflow are catalysts for a re-rating. Key risks stem from cement utilisation levels in 2011-12 and execution of power projects under Jaiprakash Power.