Jaiprakash Associates Limited - Challenging past, promising future - ANTIQUE

Post the 25% plus correction in the stock price over the last few weeks, largely on concerns of rising debt levels (consolidated debt of ~INR600bn), we believe Jaiprakash Associates Ltd. (JPA) offers a reasonable entry point to play the infrastructure sector. Post the correction, the stock also leaves some room for appreciation from any positive developments on sale of its 4.8mmt Gujarat cement unit. Additionally, our target price of INR75 factors the current stock price (after holdco discount) of Jaiprakash Power Ventures (JPVL) and Jaypee Infratech (JIL), which are trading close to their respective life-time lows. JPA holds 67.9% stake in JPVL and 71.6% stake in JIL.

Investment rationale

Quality assets keep long term earnings potential intact

On a consolidated basis, the company's asset portfolio consists of 33.3mmt of consolidated cement capacity (35.9mmt by FY14e) supported by 672MW of CPP, 165km of six lane access controlled expressway, 2,200MW of power capacity and real estate land bank. While cash flows in the near term are impacted by challenging macro environment, the long term cash flow generation potential remains intact.

Consolidation of operations alleviates concerns on debt addition

The management has indicated that there would be no further expansion plans and the complete focus will be towards strengthening the balance sheet. While there are little doubts about the execution capabilities as it has successfully completed one of the most ambitious expansion plans in the cement industry, consolidation of operations would alleviate concerns on further debt addition.

Asset sales to repay debt

While JIL has sold 300acres of land to Gaurson's Group for INR15bn, JPA has pared its stake in JIL through OFS and raised ~INR5.6bn (JPA paring its stake in JIL to 71.6% against mandatory 75% @ INR35/share shows the extent of stress due to high leverage and does worry us). Further monetisation can come from any positive developments on its efforts to sell the 4.8mmt cement capacity in Gujarat.

Valuation and outlook

At the CMP of INR63, the stock trades at a P/E and EV/EBIDTA of 13.7x and 7.8x discounting its FY15e consolidated numbers. We have a SoTP based target price of INR75 and maintain our BUY recommendation.

Source : Equity Bulls

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