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SECTOR: INFRASTRUCTURE
Jaiprakash Associates
BSE SENSEX S&P CNX
19,208 5,760 Rs122 Buy
Mar-10
Jun-10
Sep-09
Sep-10
impacted reported operational cash flows, and (5) cash flow support of Rs17.1b to
Jaypee Infratech.
Satyam Agarwal (Agarwals@MotilalOswal.com); Tel: +91 22 39825410 / Nalin Bhatt (NalinBhatt@MotilalOswal.com); Tel: +91 22 39825429
Jaiprakash Associates
FY10 annual report states that in the next round of capacity additions, Jaypee Cement
aims to produce 50mt of cement. The business has witnessed significant ramp-up in capacity
addition from 7mt in FY08 to 22.8mt in March 2010 and it aims at 34mt by FY12. This is
the fastest rollout of greenfield capacity addition in the sector. We understand a large part
of the planned cement capacity addition from 33mt to 50mt is through the setting up of
grinding units, entailing competitive capital cost.
The management expects cement production to rise from 10.7mtpa in FY10 to 28.7mtpa
in FY12, a CAGR of 64%. We have modelled cement volumes of 18mtpa in FY11 (up
77% YoY) and 25mtpa in FY12 (up 22% YoY) and have not assumed capacity addition
beyond earlier stated guidance of 33mt. We await clarity on projects identified by the
company and the timelines in achieving the target. About 10mt of the new capacity is
entitled to fiscal benefits including a 10-year exemption on sales tax and royalty for a 3mt
UP cement unit and a 10-year exemption on excise duty for a 7mt HP plant.
Given continued pricing pressure and increased fixed costs including interest and
depreciation on expanded capacity, we expect the cement business to post EBIT growth
of 13% in FY11 on volume growth of 77%. In FY12, we expect performance to improve
with EBIT growth of 55% on volume growth of 39%. A correction in cement prices is the
key risk to our estimates.
FY11-12 TO WITNESS A MEANINGFUL RAMP-UP IN MARKET SHARES GIVE INCREASED UTILIZATION
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
13 September 2010 2
Jaiprakash Associates
JAYPEE CEMENT TARGETING INITIAL PRESENCE IN EAST, SOUTH INDIA (MT, % OF TOTAL)
FY10 FY12
West,
West, 4.8, 14%
2.4, 11% North,
Central, 6.2, 18%
JPA's dependence on the
14.2,
central region will decline to 67%
52% from 67% as 33.7mt
capacity is commissioned by Central,
Eastern,
16.95,
FY12 North, 2.1, 6%
52%
4.7, 22% South,
3.5, 10%
Source: Company/MOSL
CEMENT DIVISION PERFORMANCE (RS M): FY11 VOLUME GROWTH OF 77%, EBIT GROWTH OF 13% YOY
MUCH OF THE CAPEX ON CEMENT CAPACITY EXPANSION HAS BEEN INCURRED (RS B)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10A FY11E FY12E
Source: Company/MOSL
13 September 2010 3
Jaiprakash Associates
CEMENT SECTOR ACCOUNTED FOR A LARGE PART OF CAPEX OVER FY06-10 (RS B)
Cement Others
3.0
In FY10 JPA spent Rs25b 6.2
8.0
on the cement business v/s
Rs30b in FY09. As
4.6
significant part of capex is
already made, capex
intensity would fall 1.8
6.5 3.3 0.5
6.6 15.1 22.7 30.2 24.6
1.2 3.0 2.6
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Source: Company
Production from Mandla coal block: JAL has been allotted a coal block in Mandla in
Madhya Pradesh with estimated reserves of 180mt. The mine will start operations in
2011/2012 and be used to meet coal requirement for a 7mt cement plant in Rewa, Madhya
Pradesh and a 5mt plant in Baga, Himachal Pradesh and other captive plants. The
management estimates the captive mine will lead to savings of Rs1,000-1,200/ton, as the
cost of coal (from captive mines) is estimated to be Rs1,600/ton and coal procurement
costs are Rs2,800/ton.
13 September 2010 4
Jaiprakash Associates
As at March 2010, the EPC division order book was Rs377b, of which in-house projects
contributed Rs348b (92% of the order book). The current order book includes the Ganga
Expressway Project (Rs300b), Yamuna Expressway Project (Rs30-35b) and the Karcham
Wangtoo Project (Rs10-15b). Excluding the Ganga Expressway Project, the order book
position is Rs76.5b v/s FY10 revenue of Rs56b, a book-to-bill ratio of 1.4x (the lowest in
the past several years). Given the current poor BTB ratio and gestation period for new
project contributions, we expect revenue to be stagnant until FY12 (CAGR of 1.3%).
Going forward, we expect accelerated order book accretion from in-house projects
including RE development and thermal/hydro power projects. These include civil
construction for 1.5GW lower Siang hydro power project (expected completion by FY16),
5GW Thermo project, 15-20msf p.a. of RE development possibilities, etc. The management
highlighted participation in bidding for certain large BOT road projects and hydro projects
on an EPC basis, which should also add to the order book in FY11 and FY12.
We have modelled in EBIT EBIT margins in 1QFY11 fell substantially to 7.3% from 17% in 1QFY10 and 21% in
margins of 20% in FY11, FY10. Margins were impacted by: 1) higher contribution from low margin in-house
entailing residual margins of construction work (Yamuna Expressway Project contributed 40-45% of 1QFY11 revenue),
26% in 9MFY11, and and 2) force majeure at Srisailam irrigation project due to flooding in one of the two
disappointments will lead to tunnels in mid-FY10, leading to tunnel boring machine (TBM) being submerged. Thus,
earnings downgrades. continued site establishment expenses impacted margins, since there was no revenue
recognition from the second tunnel. We have modelled in EBIT margins of 20% in FY11,
entailing margins of 26% in 9MFY11, and disappointments will lead to earnings downgrades.
EPC DIVISION BIDS FOR PROJECTS, QUALIFIES FOR EXPRESSWAY, POWER PROJECT
BOOK-TO-BILL (EXCLUDING GANGA EXPRESSWAY) RATIO 1.4X, LOWEST IN SEVERAL YEARS (RS B)
Source: Company
13 September 2010 5
Jaiprakash Associates
FY10 EPC REVENUE GROWTH ATTRIBUTABLE TO HIGHER EXECUTION FROM YAMUNA EXPRESSWAY, KARCHAM
WANGTOO (RS B)
57.4
55.9
53.7
and Yamuna Expressway 23.8 CAGR of 50%
29.4
11.7
10.7
11.5
7.6
20.0
18.5
5.1
4.5
4.8
17.9
16.8
3.5
3.6
16.6
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
31.2 30.0
26.4 25.0
21.0 20.0 20.0
We have modelled in EBIT 17.2
margins of 20% in FY11 12.2
entailing residual margins of 7.3
26% in 9MFY11 and
disappointments will lead to
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
earnings downgrades
Source: Company/MOSL
13 September 2010 6
Jaiprakash Associates
With a land bank of 1.2bsf The Jaypee group, including Jaiprakash Associates, Jaypee Infratech and JPSK Sports,
(excluding 3.3bsf from the crossed cumulative real estate (RE) bookings (pre-sales) of Rs126b as at June 2010
Ganga Expressway Project), (35.8msf). This is commendable given that a large part of the sales took place over the
the group has the largest past two years, and makes the Jaypee group by far the largest RE developer in the NCR.
land bank in the NCR Cumulative advances received were Rs52.5b (42% of bookings). With a land bank of
1.2bsf (excluding 3.3bsf from the Ganga Expressway Project), the group has the largest
land bank in the NCR.
Real estate consolidated revenue (net off inter-group transactions) was Rs6.8b in FY10
(v/s Rs8b in FY09). The decline in FY10 is given the elimination of Rs6.2b of inter-
company transactions (largely towards land purchases for a commercial office by JPA
from Jaypee Infratech). We expect a meaningful ramp up in revenue recognition from
FY11. Sales in the Noida project crossed the 30% revenue recognition stage (including
land cost) for JPA in 1QFY11. For Jaypee Infratech it is expected to cross the 30% mark
by the end of FY11. In 1QFY11 JPA posted an increase in real estate revenue bookings of
Rs3.7b v/s Rs952m a year earlier and Rs6.5b in FY10.
4 8 29 36
*Includes sales by Jaypee Infratech, Jaiprakash Associates, etc, # Includes sales by Jaiprakash Associates,
JPSK, etc Source: Company/MOSL
30
49
Launch o f "Jaypee
were Rs39b (37% of sales). 4,000
41
38
39
27
2,000
18
16
in lo wer average
16
13
13
10
transactions with RE
0 -2,000
Mar-08
June-08
Dec-08
Mar-09
Jun-09
Dec-09
Mar-10
Jun-10
Sept-08
Sep-09
Mar-08
June-08
Dec-08
Mar-09
Jun-09
Dec-09
Mar-10
June-10
Aug-08
Aug-09
bookings of 20msf
Sept-08
Sep-09
Aug-08
Aug-09
Source: Company/MOSL
13 September 2010 7
Jaiprakash Associates
Revenues EBIT
3,661
3,456
We understand that a spurt
2,743
2,558
1,555
1,558
1,470
in 1QFY11 was because the
Noida project crossed the
810
1,245
447
378
revenue recognition
292
273
266
272
952
884
100
748
664
threshold of 30%
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company/MOSL
13 September 2010 8
Jaiprakash Associates
We expect JPA to post earnings of 29% CAGR over FY10-12, driven by EBIT in the
cement division of 32% CAGR, 33% CAGR in real estate EBIT and stagnant EPC
profitability. Reported net profit is expected at Rs9.4b in FY11 (up 5% YoY) and Rs15.5b
in FY12 (up 58% YoY).
Source: Company
13 September 2010 9
Jaiprakash Associates
STANDALONE CONSOLIDATED
Standalone borrowings
increased by Rs48b in FY10,
despite sale of treasury stock
(Rs17b), to meet higher
working capital
requirements and advances/
investment to subsidiaries
Source: Company
13 September 2010 10
Jaiprakash Associates
Based on the SOTP methodology, we arrive at a price target of Rs136, comprising the
core business at Rs48/share, investment in hydro and thermal power projects at Rs42/
share, Jaypee Infratech at Rs32/share, Jaypee Greens at Rs5/share, land bank at Noida at
Rs2/share and other investment at Rs5/share. We have not factored in possible value
creation from 10mt+ capacity cement unit scheduled for commissioning after FY12, the
Ganga Expressway Project and a Formula-1 project with an integrated sports complex.
At the CMP of Rs122, JPA trades at PER of 28x FY11E and 18x FY12E. Maintain Buy.
E&C Business Construction FY11 EV/EBIT 10.0 107,366 51 At par with Industry Average
Cement Business Cement FY11 EV/ton 95 132,307 62 At discount to Industry average
Coal Mining Mining Book Value 9,000 4
Cash Book Value 42,885 20 Book value FY10
Firm Value 291,557 137
Debt Book Value 189,364 89
Equity Value (A) 102,193 48
Subsidiary Companies
Jaiprakash Power Hydro Power NPV of project 77,797 37 At NPV of project development
Ventures Ltd. development
Jaypee Karcham Hydro Power P/BV 12,274 6 At NPV of project development
Hydro Corp Ltd.
Jaypee Ganga Infra Road Project/ Book Value 4,219 2 Advances towards equity and
Real Estate equity investment
Total (B) 101,449 48
Real Estate / BOT
Jaypee Greens Real Estate NPV of project 10,937 5 At project NAV
development
Jaypee Infratech Road Deve/ 25% Discount 68,776 32 83.1% stake valued at 25% discount
Real Estate to CMP to market cap.
Land bank at NOIDA Real Estate NPV/acre 4,800 2 Rs60m/acre based on project NPV for
Yamuna Expressway
Total (C) 84,513 40
Total ( A + B + C ) 288,155 136
Source: MOSL
2,404
189
90
2,125
Source: Company
13 September 2010 11
Jaiprakash Associates
PARTICULARS STANDALONE
FY10 FY09
13 September 2010 12
Jaiprakash Associates
Power Projects
Karcham Wangtoo 7,500 9,250 9,250
Jaiprakash Power Ventures 8,428 8,428 8,428
Cement JVs 1,192 2,189 4,094
Yamuna Expressway 9,550 9,550 12,150
Ganga Expressway 920 2,734 4,219
Treasury Stock - 9,684 6,040
JPSK Sports (JPSI) 16 121 4,999
MFs/ Liquid funds - - 4,094
Others 4,644 196 2,490
Total 32,250 42,151 55,763
Source: Company
Consolidated DER 3.1x, adjusted operating cash flow positive (v/s reported
negative cash flow)
For JPA, the increase in consolidated DER from 2.3x in FY09 to 3.1x was largely due
to securitization of debt raised in Baspa and Vishnuprayag hydro power project (Rs11b),
an FCCB issue (Rs9b) in Jaypee Power Ventures and SPV debt increase in Jaypee
Infratech (~Rs4b).
In FY10, operating cash flows for JPA on a consolidated basis was negative at Rs10.2b
v/s positive cash flow of Rs7.6b. A decline in cash flow was largely due to land
payments (part of projects under construction) to the extent of ~Rs20b by Jaypee
Infratech to acquire the Yamua Expressway Project land and JPSK Sports for the
acquisition of 1,000 hectares for a Formula-1 track project. Adjusted for this, the
operating cash flow would be a positive Rs10.4b, v/s Rs8.7b in FY09.
OPERATING CASH FLOW POSITIVE, ADJUSTED FOR ONE-TIME LAND PAYMENT (RS M)
FY10 FY09
13 September 2010 13
Jaiprakash Associates
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Jaiprakash Associates
N O T E S
13 September 2010 15
Jaiprakash Associates
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13 September 2010 16