Thursday, August 11, 2011

Jaiprakash Associates - Buy on steep falls !

In Q4FY2011, Jaiprakash Associates Ltd (JAL) on a standalone basis posted a net profit of Rs302 crore (increased by 23.8% on a year-on-year [y-o-y] basis), which is below our expectation on account of a lower than expected profitability in the construction and real estate division. However, the performance of its cement division was in line with our estimates and partially negated the impact of the poor performance of the construction division.

JAL’s revenues grew by 21.4%y-o-y to Rs 3,982 crore in Q4FY2011 which is ahead of our estimates. The impressive revenue growth has been largely driven by a strong revenue growth posted by its cement division (of 28.8%; supported by volume growth) and the stupendous revenue growth in its real estate division (of 379.8%). However, the performance of the construction division suffered during the quarter and declined by 10.8% y-o-y to Rs1,761 crore due to the completion of the Karcham Wangtoo project and on slow execution of the Yamuna Expressway project, both of which are key projects for the company.

The operating profit margin (OPM) contracted by 267 basis points y-o-y to 21.4% in Q4FY2011 on account of a sharp decline in the construction divisions earnings before interest and tax (EBIT) margin (declined by 8 percentage points to 12.4%) which was due to the completion of the relatively high margin Karcham Wangtoo project. Further, the profitability of the cement division also contracted by around 10 percentage pointsy-o-y to 14%. However, a sharp increase in the EBIT of the real estate division to 47.9% in the current quarter as compared to 31.2% in Q4FY2010 has restricted the overall OPM contraction to 267 basis points. Consequently the operating profit grew by 7.9% (as compared to a 21.4% growth in the revenue) to Rs 851 crore.

The interest and depreciation outgo were higher by 35.4% and 13.1% respectively on a y-o-y basis on account of capacity addition in the cement division and installation of captive power plants. However, on account of the higher than expected other income (increased by 18.5% y-o-y) due to dividend received by Jaypee Infratech and lower than expected effective tax rate of 22.1% as compared to 43.7% in Q4FY2010, the company managed to register a 23.8% earnings growth.

For the full year FY2011 the company has delivered a net sales growth of 28.5% to Rs 12,966 crore. However, on account of margin contraction and a surge in the interest and depreciation charges, the adjusted standalone earnings of the company have declined by 7.5% to Rs 653 crore.

We have re-visited our earnings estimates for FY2012 and FY2013 mainly to factor in the delay in the execution of the Yamuna Expressway project and the overall margin pressure. Consequently the revised earning per share (EPS) estimate for FY2012 and FY2013 works out to Rs 4.4 and Rs 5.7 respectively.

We continue to like JP Associates due to its diversified business model and aggressive expansion plan. In terms of valuation, we continue to value the stock using the sum-of-the parts (SOTP) valuation methodology and arrive at a value of Rs130 per share. We maintain our BUY recommendation on the stock with a revised price target of Rs130. At the current market price, the stock is trading at a price earning (PE) of 18.7x FY2012E and 14.6x FY2013E earnings.

Our Recommendation :

The way the scrip has been falling looks like it will reach Rs.50 levels sooner than later. The following chart shows results of this scrip for the last 1 year.

Time Span Price Change %Change
Today 63.85 2.45 3.99
Week 64.45 -3.05 -4.73
Month 79.65 -18.25 -22.91
Three Months 86.85 -25.45 -29.30
Six Months 76.15 -14.75 -19.36
One Year 118.40 -57.00 -48.14
Two Years 145.44 -84.04 -84.04
Three Years 122.34 -60.94 -49.81

Our Recommendation :

Long term investors should look to buy the scrip around Rs.50 levels and hold for a period of 2-3 years for a target price of Rs.90 giving a bumper profit of 80% on investment. A staggered buying strategy should bring down the acquisition costs in this high beta stock which can swing wildly both on the up and down sides !

Bought to you by

Ingenious Investor
Equity Research Division

Ravina Consulting
Pattamal Plaza
3rd Cross Kamanahalli

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