JP Associates: Operating metrics show improvement

Higher margins, revenue growth key positives analysts bet on value accretion in land bank

Jaiprakash Associates is back in focus after its shares were hammered 25 per cent in April. Since Friday, the company’s shares have risen seven per cent, owing to better-than-expected fourth quarter numbers. Completion of the company’s Yamuna Expressway project also provided support.

On a standalone basis, the company’s adjusted net profit stood at Rs 279 crore in the quarter ended March 31, way more than the Street’s expectations. The profitability was driven mainly by revenue growth in the construction (a rise of 42 per cent sequentially) and real estate (a rise of 81 per cent sequentially) divisions. Though year-on-year (y-o-y), both divisions reported fall in revenue, there were marked improvements over the third quarter. The effective tax rate, too, was lower than expected. This also has helped shore up profits.

But what came as a surprise was margin expansion. Jaiprakash’s blended earnings before interest, taxes, depreciation and amortisation margin jumped 380 basis points y-o-y to 25 per cent. The construction segment’s Ebit margin jumped 1,165 basis points y-o-y to 24 per cent. However, sequentially, it was lower by 590 basis points. According to Angel Broking, “This was on account of completion of the Yamuna Expressway and the Karcham Wangtoo project. For the financial year ended March 31, the construction segment’s revenue declined 3.5 per cent to Rs 5,842 crore, while its Ebit margin, at 27.5 per cent, saw an improvement of 1,217 basis points.”

However, amid turbulent conditions, the market is taking a relook at stocks like Jaiprakash Associates, as the company is sitting on substantial real estate assets. It has huge tracts of land in Noida, Greater Noida and along the Yamuna Expressway. These offer potential for value accretion, believes Enam Securities.

Analysts also believe the company’s cement division has an implied valuation of $90 a tonne, which comes at a discount to peers on lower profitability and capacity utilisation. However, companies that have operational plants would enjoy better pricing power and utilisation would also improve, as capacity addition slows. Enam believes the business has potential for re-rating. However, concerns on its debt and consequently, on the high interest payout would remain. Also, considering the market, the company may find it difficult to sell its Gujarat cement plant, which it has demerged into a separate entity.