Sunday, May 2, 2010

Jaypee Infratech - IPO Invest at Cut off


Ride on the twin advantage.

Vidya Bala

Investors with a penchant for risk can consider the initial public offer of infrastructure developer, Jaypee Infratech, a subsidiary of the listed Jaiprakash Associates. A unique combination of infrastructure and real-estate development, with each segment driving the other's prospects, is the company's key advantage.

The company is in an advanced stage of expressway construction that is likely to be commissioned two years ahead of schedule. This combined with the availability of low-cost land for real-estate development (with a good part in Noida) provide earnings visibility to Jaypee Infratech. Revenues and earnings could be lumpy until 2011, after which the expressway would start earning toll revenues. Income from real-estate development would be the key contributor to revenues until such time.

The primary risk to this recommendation is that both the business segments are working-capital intensive and, until such time, the expressway is complete, liquidity could be tight. Inability to fully monetise the land bank would also mute growth.

The offer price band is Rs 102-117. Retail investors would get a 5 per cent discount on the offer price. Post- discount, the company's share is likely to trade at 24-27 times its annualised per share earnings for FY-10 on an expanded capital base on listing.

This is at par with infrastructure industry average. On a price-to-book basis, the valuation comes to 3.7-4.2 times; at a marginal discount to IRB Infrastructure Developers, which has a larger portfolio of roads in operation. On an enterprise value to earnings before interest, depreciation, taxation and amortisation (EBITDA) basis, Jaypee Infratech appears to be valued closer to real estate players rather than infrastructure. Given that revenues from real estate are likely to be higher than income from toll, the valuation appears justified.

The company and offer

Jaypee Infratech was launched as a special purpose vehicle in 2007 to implement a single road concession agreement — Yamuna Expressway — that connects Noida to Agra through a 165-km single expressway, built in Uttar Pradesh. The concession would allow Jaypee Infratech to operate and collect tolls for a period of 36 years. This comes with about 6,175 acres of land (translating in to 530 million sq ft of area) for real-estate development for a lease period of 90 years. The land can be developed or sold at the discretion of Jaypee.

The company proposes to raise about Rs 1,650 core through fresh issue of shares, while the parent company, Jaiprakash Associates, would receive about Rs 700 crore through an offer for sale. The offer proceeds would be utilised predominantly to fund the expressway.

De-risked

Jaypee Infratech has timed its capital market foray after two key risk factors have been addressed. One, the entire Rs 6,000 crore debt, of the Rs 9740 crore of project cost has been tied up. The remaining funding has been done through promoter contribution and cash flow from real-estate activity. The current offer proceeds would go towards funding only 15 per cent of the project cost. Two, the company is in possession of 96 per cent of the land required for the expressway and expects to complete the project by 2011, two years ahead of the 2013 target. Three, Jaiprakash Associates, the parent, with wide experience in execution of large projects, is the contractor.

Besides, 70 per cent of the land proposed for real estate has also been handed over to the company.

Due to the above factors, Jaypee Infratech enjoys several advantages: The company would enjoy cost-efficiencies, given Jaiprakash Associates' captive cement production and ownership of stone aggregates. The company is unlikely to be leveraged further as the projects have tied up full funding. The company has stated that it would keep the real-estate development self-financed, as it can sell land to monetise it, apart from developing the same.

Low-cost land

Towards this end, Jaypee has already booked profits for the year ending FY-09 and nine months ending December 2009 by selling residential and commercial plots. It has also initiated development of 24 million sq ft of five residential and one commercial project, 88 per cent of which has been sold and advance received, although none has reached the revenue-booking stage. Jaypee's biggest advantage in this project is the lucrative land bank that has been leased to it. At the anticipated cost of Rs 2,619 crore (besides an insignificant annual lease), the land cost works out to Rs 25 lakh per acre. It has also stated that the cost of a small portion of the land sold in Noida was Rs 50 lakh per acre a couple of years ago.

Weighed against about Rs 5 crore per acre incurred by a few other large players in Noida in recent times, Jaypee's deal could be termed a steal. This edge would allow Jaypee to price its projects aggressively, especially in Noida. The company did launch its initial phase of residential projects at a list price of Rs 2100 per sq. ft, drastically lower than competitors' rates. For the nine months ended December, Jaypee's sales were Rs 525 crore and net profits Rs 399 crore, the high margins arising solely on account of selling plots. The 76 per cent net profit margin is unlikely to sustain once the company's development costs and revenue are brought into the books.

A good part of the revenue for the nine-month ended December came from associate companies for hotel and certain other developments in the township. Going forward, as revenue from residential projects are brought into books, income from associates may dwindle as a proportion of the total revenue. With 88 per cent pre-sales and the entire current development to be completed by 2013, the existing projects could well manage their working capital from advances; even as toll revenues are expected to kick in from 2012.

Real-estate development may turn out to be the key driver of revenues and improve prospects for the expressway. After all, the existence of crucial infrastructure such as road, power (hydro power to be developed by associate company) and water in integrated townships are the key attractions for buyers of property in Tier-II and Tier-III areas.

Toll

Toll revenues on the road project would be subject to the UP Government's toll regulations, which currently allow about Rs 1.9/km as against Rs 1.4/km for the Mumbai-Pune Expressway. Jaypee may have to start at modest toll rates to attract traffic. The expressway has the advantage of operating within a single State, thus reducing hassles of inter-state movement for commercial traffic. Tourist destinations such as Mathura (along the expressway) and Agra candrive traffic volume.

An international airport and extension of Delhi Metro are other factors that could drive traffic. Nevertheless, the expressway cannot at this point look forward to volumes similar to the industrialised Mumbai-Pune route.

Lack of volumes may, however, be compensated by real-estate activity. It is perhaps for this reason that the government has chosen to bundle this expressway project with such massive tracts of land for real-estate development.

The offer closes on May 4.

Source : BL

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