Buy Jaiprakash Associates - Motilal Oswal

Jaiprakash Associates (JPA IN; Mkt Cap USD5.3b, CMP Rs129, Buy)

- 1QFY11 adjusted PAT below estimate: During 1QFY11, Jaiprakash Associates net profit of Rs5.2b (up 5% YoY), which includes profit on sale of 4.9% stake in Jayee Infratech of Rs5.2b as part of the IPO. Adjusted for the one-time gain of Rs5.2b (and tax charge of Rs1b on the same), net profit in 1QFY11 stood at Rs1.1b, lower than our estimate of Rs2b. Also, 1QFY11 Net profit is impacted due to: 1) Lower E&C division margin, 2) higher interest and depreciation cost and 3) lower other income.

- Cement volume growth of 64% YoY, EBITDA/ton marginally up QoQ: During 1QFY11, cement business revenues stood at Rs14.4b, up 52% YoY; given volume (3.9m ton) growth of 64% YoY and realization (Rs3,696/ton) decline of 7% YoY. EBIDTA/ton for Cement business stood at Rs1,042/ton in 1QFY11 (vs Rs1,540/ton YoY), vs Rs1,012/ton in 4QFY10. JPA commissioned three new cement plants with capacity of 4.4mtpa in 4QFY10 / 1QFY11, resulting in increased interest and depreciation in 1QFY11.

- E&C business margins impacted by one-offs, poor revenue composition: Revenue from E&C division stood at Rs14.4b (up 52% YoY), while EBIT stood at Rs1.1b (down 42% YoY). EBIT margins declined substantially to 7.3%, vs 17% in 1QFY10 and 21% in FY10. EBIT margin was impacted on account of: 1) Higher contribution from low margin in-house construction work and 2) Force majeure at Srisailam irrigation project due to flooding leading to continued site establishment expenses, and no revenue recognition. Management maintained guidance for FY11, and expects EBITDA margins at 18-20% for FY11.

- Valuations and view: We expect JPA to report net profit of Rs9.8b in FY11 (up 6% YoY), and Rs13b in FY12E (up 33% YoY). Based on SOTP methodology, we arrive at price target of Rs158/sh, comprising of E&C business Rs38/sh (6x FY12 EV/EBIT), Cement business Rs66/sh (EV/ton of US$90/ton for FY11E capacity), Power generation portfolio Rs47/sh, Jaypee Infratech Rs52/sh, Jaypee Greens Rs6/sh, less net debt of Rs55/sh. The stock trades at PER of 25x FY11E and 19x FY12E. Maintain Buy.

Source : Equity Bulls

Keywords