Buy Jaiprakash Associates Ltd., shorterm calls, free calls

Target price Rs171
CM Price Rs.144.20

Strong foothold
Key takeaways from our management meet with Jaiprakash Associates (JPA) are i) strong volume growth in cement besides low-cost production and better market mix, ii) robust Rs400bn EPC orderbook, predominantly in house, iii) execution of 13.5GW power portfolio proceeding as per plans – merger of unlisted power holding company into listed subsidiary and iv) robust 11.5mn sqft sale of real estate YTDFY10 & soft launch of Jaypee Greens Sport City spread over 2,500 acres. We believe market concerns on funding can be alleviated via: i) annual operating cashflow of Rs10-12bn, ii) sale of treasury shares, currently valued at Rs27bn, iii) securitisation of its power portfolio worth Rs27.5bn and iv) fund raising initiatives of Rs40bn in both power and real estate. We expect consolidated revenue, EBITDA and PAT CAGR to be 37%, 40% and 38% in FY09- 12E. We maintain BUY with sum-of-the-parts (SOTP) target price of Rs171/share.

• Cement volumes strong. YTDFY10 cement despatches rose 32% YoY to 6.3mnte and crossed 1mnte/month in November ’09. JPA recently commissioned 1.2mnte plant in Gujarat and expects to add 3.5mnte capacity at Baga/Bagheri in North India by February-March ’10. We factor in 36% volume growth to 10.4mnte in FY10E.

• Robust EPC order pipeline. The Yamuna Expressway and Karcham Wangtoo are progressing well, likely to be completed by March ’11 & May ’11 respectively. JPA recently bagged Rs11bn contract for developing the inner ring road at Agra. Besides current EPC contracts of Rs400bn, predominantly in house, we estimate additional Rs200bn EPC contracts from in-house power portfolio and real estate construction.

• Significant option value exists in power and real estate. With 700MW operational assets and 2,820MW projects under implementation (1,000MW transmission rights), JPA is likely to have 8.8GW power portfolio by December ’15. The merger of its unlisted power holding company into its listed subsidiary would unlock value, in our view. Besides, JPA sold 12mnsqft YTDFY10, aggregating upfront collections of Rs7.5bn. Also, JPA recently soft launched Jaypee Green Sports City, spread over 2,500 acres. JPA intends to raise Rs25bn via IPO for its real estate and Rs15bn via FPO/QIP during February-March ’10, which would further unlock value.

Valuations reflect multi-year high growth

Maintain BUY with target price to Rs171
Our SOTP-based value for JPA is Rs357bn or Rs171/share. At the current market price of Rs144, the stock trades at consolidated FY12E EV/E of 12x. We believe valuations are reflective of multi-year high growth in the diversified infrastructure space. Also, significant option value exists in its power and real estate portfolios, which would get unlocked as funding issues are alleviated. We have valued only projects that have high chances of being implemented. We have not factored in any projects which are at an initial stage of development such as: i) 1,895MW of hydro power plants in Arunachal Pradesh and Meghalaya, ii) 750MW of Bina power projects – Phase II and 1,980MW thermal power plants in Uttar Pradesh, iii) real estate development rights for 5,000 acres land along the Yamuna Expressway, iv) Ganga Expressway, which has 1,047Kms tolling rights and related 3.3bn sqft real estate development rights for 30,000 acres land bank, v) F1 race tracks and associated real estate development of 650 hectares and vi) value of carbon credits.

Key triggers
Upside triggers are: i) higher-than-expected cement volumes/realisations, ii) faster execution in construction and real estate, iii) timely funding of power and other projects and iv) speedier implementation of power projects. Downside risks are: i) slower executions, ii) funding gaps/high debts iii) increased inter-group transactions and iv) political constraints.

Cement – Aggressive capacity addition lined up
JPA’s incremental capacity would be more widespread, with 4.7mtpa coming in from North, 4.8mtpa from West, 4.3mtpa from East and 3.5mtpa from South.

JPA’s market share to rise to 7% by FY12E
With aggressive capacity addition lined up by JPA, we expect the company to double its capacity to over 27mtpa by FY12E from 13.5mtpa in FY09. JPA has a share of 16% in incremental capacity addition and thus, we expect the company to increase its volume market share to 7% by FY12E from the current 4.1%.

Cement despatches YTDFY10 rose 32% YoY to 6.3mnte and have crossed 1mnte/month in November ’09. JPA recently commissioned 1.2mnte plant in Gujarat and expects to add 3.5mnte capacity at Baga/Bagheri in North India by February- March ’10.

We have factored in 6% increase in average realisation for FY10E and 3% decline for FY11E. We have accounted for 36% & 31% volume growth to 10.4mtpa and 13.6mtpa for FY10E & FY11E respectively (significantly lower than management expectations of 13-14mtpa for FY10), thus providing upside to our estimates.

Robust EPC order pipeline
The Yamuna Expressway and Karcham Wangtoo are progressing well – Expected to be completed by March ’11 and May ’11 respectively. JPA has recently bagged Rs11bn contract for developing the inner ring road at Agra. Besides current EPC contracts worth Rs400bn, predominantly in house, we estimate additional Rs200bn EPC contracts from in-house power portfolio and real estate construction.

We expect 25% standalone construction revenue CAGR over FY09-12E and estimate the EBIT margin to decline to 20.5% from 25.7% through FY12E as a significant part of revenues would come from the low-margin Yamuna Expressway project.

Real Estate – Emerging strong, offers significant option value
JPA sold 12mnsqft real estate (Jaypee Greens – Noida, Yamuna Expressway) YTDFY10, aggregating upfront collections of Rs7.5bn. JPA has 3,079 acres (of 6,250 acres as a part of Yamuna Expressway contracts) under its possession and expects to get the balance by March ’10. Also, JPA has recently soft launched Jaypee Green Sports City, spread over 2,500 acres. JPA intends to raise Rs25bn via IPO for its real estate during February-March ’10 (valuing Jaypee Infratech at Rs160bn), which would further unlock value.

Power – Well on track, offers significant option value
With 700MW operational assets and 2,820MW projects under implementation (1,000MW transmission rights), JPA is likely to have 8.8GW power portfolio by December ’15. The merger of unlisted power holding company, Jaypee Power Ventures into JPA’s listed subsidiary, Jaiprakash Hydro-Power would unlock value, in our view. JPA intends to raise Rs15bn via FPO/QIP during February-March ’’10.

Report card

Attribute	Value	Date
PE ratio	22.53	24/12/09
EPS (Rs)	6.40	Mar, 09
Sales (Rs crore)	1,888.85	Sep, 09
Face Value (Rs)	2
Net profit margin (%)	14.55	Mar, 09
Last bonus	1:2	21/10/09
Last dividend (%)	27	15/10/09
Return on average equity	14.5	Mar, 09