Buy-jaiprakash Associates Target 110 Research Report Feb 2009

12 February, 2009

Jaiprakash Associates

India Diversified

CMP:

Rs.73

Target:

Rs. 110

— We initiate a BUY with a one year target of 114. At CMP of Rs 73, the stock is trading at 14x TTM EPS of Rs 5.2 and trailing P/BV of 2. Stock is trading at, trailing P/BV of 2, forward P/E Ratio 9 for (FY10E) and 6 for (FY11E). We recommend the investors to BUY the stock, with our 12 month price target of Rs 110 providing an upside potential of 52%.

Sovid Gupta Equity Analyst: Fairwealth Securities Private. Ltd.

Earnings for 2009 are expected to show a modest increase Strong Q3 09 numbers should allay much of the fears of the investors about company’s future valuations and Earnings potential.

Outlook:

Priced on Feb’12, 2009 ±% potential Target set on

52% 12 Feb’09

Market Data Beta 12M hi/lo Market cap, INR Millions Shares in issue (mn.) Reuters Bloomberg

1.75 510 / 64 86350 1,173.8 JAIA.BO JPA: IN

Share Holding Pattern Promoters MF’s FII Others

Our Outlook for the stock remains immensely positive considering company’s huge order book contributing to assured revenues over next 6 years, and huge land bank value which will unlock in coming years. Company is going to witness exponential growth in revenues from 4 sectors. i.e. Cement (Capacities to triple), Construction(Revenue Growth at 40% CAGR over next 3 years), Real Estate and Hotels( We expect EBITDA to increase from 8% in Q3 to around 30% in 3 years), and Power(3000 MW capacity addition over next 6 years expected)

44.44% 13.0% 21.7% 20.9%

Restructuring Highlights: Jaiprakash Associates (JPA) under flagship of Jaypee Group has decided to acquire four Companies and merged into JPA. The companies are as under:• • • •

Jaypee Hotels Ltd (JPH) Jaypee Cements Ltd (JPC) Gujarat Anjan Cements Ltd (GAC) Jaiprakash Enterprises Ltd (JEL)

As per the scheme of the merger, the swap ratio will be 1:1 for JHL, 1:10 for JCL, 3:1 for JEL, and 1:11 for GACL. Since the Company is planning to transfer the cross-holding to a trust instead of cancelling it, it is likely to issue 220 million new shares, which will result in the dilution of earnings. After acquisition of four companies by JPA as stated herein above, 22.04 crore shares of JPA of Rs.44.08 crores would be issued. As a result equity dilution will rise by 18.77% from Rs. 234.76 crores to Rs.278.84 crores. Of 22.04 crore new shares of JPA being issued, 10.60 crore shares would get parked in Trust, while 11.44 crore shares would get issued to non-JPA shareholders. Our take on this step is positive as it will help company in raising more funds as the company has huge line up of projects. Company definitely needs to raise Equity and bring down Debt Equity levels to a more suitable level of 2:1.

Fairwealth Securities

Page 1

Jaiprakash Associates - Buy

Result Round up: Higher revenues and lower margins for the construction and cement business.

Increase in Top line by 47%. Cement and Construction margins down.

Increased contribution from real estate projects.

Sales jumped to Rs. 1321.69 crore. Revenues from Real Estate sector increased by 150% q-o-q. Cement sales grew 11%. Margins however, were trimmed by 606 bps from 24.76% to 18.71%. Construction revenues grew by 71% with increased margins from the Baglihar project to the tune of 350 bps and huge dilution of 700 bps, due to lower margins from Taj Yamuna Express way. Tempered by falling margins, Operating Profit rose to Rs. 247.26 cr (+10.97 % Y-o-Y). After providing for interest, the company generated cash profit before depreciation Rs. 273.52 Crore.

Achievements (FY07-FY08): Engineering and Construction • Participated in 54% of hydropower projects in the 10th Five Year Plan. • Built largest underground surface powerhouse. • Following Projects with power generation capacity of 1,030 MW completed during 2007-08: a. Teesta-V Hydro-electric Project (510 MW) in Sikkim. b. Omkareshwar Hydro-electric Project (520 MW) in Madhya Pradesh. Cement • To be a 30 Million Ton Per Annum cement producer by 2011. Power • India's largest private sector hydropower producer. • Slated to be a 4270 MW power entity by 2013. Real Estate & Expressway • Constructing 165 km Noida - Agra, Yamuna Expressway.

•

Constructing 1047 km Noida - Ballia, Ganga Expressway.

•

Real Estate Development rights for over 37 million square feet.

Industry Potential Company gets all its revenues from Sunrise sectors like Infrastructure, Real Estate and Power. Although marred by recession country is still likely to witness more than 6% growth over next 10 years, which will add around 1 trillion dollars to Indian GDP. Installed capacity of the cement industry is expected to increase to 219 MTPA by financial year 2009 from 198.62 MTPA in the financial year 2008. It will further go up to 241 MTPA by the financial year 2010, according to an ICRA Industry Monitor report. We expect strong showing by cement companies although with lower realizations, continuous growth in Infrastructure as 4 lane and above highway development remains a priority sector for both UPA and NDA governments. And hydel power development remains another major priority considering India’s potential of 150,000 MW of Hydel capacity and efforts to keep Thermal to Hydel ratio of 60:40.

Fairwealth Securities

Page 2

Jaiprakash Associates - Buy Company Description: Jaiprakash Associates Limited is India’s leading Engineering and Construction Company and fourth largest cement manufacturer with strong focus on development of River Valley and Hydro Electric Projects. The company's business can be broadly classified in the following sectors: 1. Engineering & Construction 2. Cement 3. Energy (Power, Oil & Gas) 4. Real Estate and Expressways 5. Hospitality

Cement Division: The cement segment contributes around 40% to the standalone net revenues of the Company. Jaiprakash Associates has a total installed capacity of 11.5 MTPA (FY08), and as per the management, more than 4 MTPA of new capacity is expected to be commissioned in the next 2–3 months..The cement revenue was driven by volume growth of 15% on account of commissioning of 2 MTPA plant in MP and ramp up at earlier commissioned capacities in Uttar Pradesh and a grinding unit at Haryana. With this addition of new capacity the total production capacity will be ~18 MMTPA. Company plans to raise capacities to up to 25 MTPA by 2010 and to further expand it to 30 MTPA by 2011. Company is developing its captive power units in most of the cement plants to reduce costs. JAL has so far commissioned captive thermal power plants with an aggregate capacity of 88.50 MW. Company has also procured coal blocks in Madhya Pradesh to meet its captive power requirement for future capacity expansion in Cement division. .

Engineering and Construction Division: Given the robust growth of the Indian economy, investment in the roads and bridges sector, during the Eleventh Plan is projected at US$ 78.5 billion over the five-year period starting from 2007-08. Construction work on Yamuna Expressway project is in progress and the project is schedules to be completed by 2010. On the revenue growth of 71% the construction division recorded pre-exceptional EBIT growth of 111% (EBIT of Rs922 mn). The EBIT margins for the construction division (excluding severance pay to workers of Bagilhar Project) improved by 350 bps yoy from 14.7% to 19% on account of strong execution of projects like Karchamwangtoo which is witnessing the peak of its execution. However the same fell by a massive 1300 bps Q-o-Q due to increased share of revenues from Taj Expressway where margins are lower compared to complex construction projects.

Fairwealth Securities

Page 3

Jaiprakash Associates - Buy EBIDTA margins for the Engineering and Construction sector is significantly lower, especially in projects which do not require much capital outlay as well as in those projects which are of comparatively low value. Consequently E&C lower margins for contribution from increased.

division witnessed Q3’09 as revenue Taj Expressway

Real Estate Segment: Company won the 6 Lane 160 KM Taj Expressway project, through which it got 25 million square feet of Land Development rights at 5 locations between Noida and Agra. Most of the land that company got was at 2003 rates. Rates since then have increased manifold. Company also has real estate comprising of residential, commercial and institutional development spread across 452 acres of land in Greater Noida, Uttar Pradesh, India. Company also got rights to develop part of 1047 KM 8 lane Ganga Express way, which will give company to develop part of 30000 acres total entailed for development. Energy Segment:

Company has assured land development rights for 37 million square feet in Noida, Greater Noida, along with other places between Agra and Greater Noida. Separate independent valuations have valued these lands at over 2 billion USD. This does not include additional land development right company will earn through Ganga Expressway project.

JAL is developing India's largest BOO Hydro power project --- the 1,000 MW Karcham Wantoo project in Himachal Pradesh, which is expected to be commissioned by 2011. This will increase the Company’s hydro power operating assets to 1,700 MW, Company plans to scale up its total Hydel Power capacity under BOOT model to up to 5000 MW(2500 MW in Arunachal Pradesh and 700 MW in Meghalaya, along with 1700 mentioned already).

Hospitality: Company operates 3 five star properties and also manages 2 other properties which are owned by the company. During the yaer 2007-08 the compnany achieved the turnover of Rs. 172.91 Crores as compared to Rs. 130.80 Crores in previous year registering the growth of 32%. The Net profit for the year was registered at Rs. 17.54 Crores vis-a-vis Rs. 13.64 Crores in previous year.

Future Estimates Net Sales (RS. Crores)

PAT (Rs. Crores)

EPS

P/E

FY07

4,149

566

4.04

18.55

FY08

4,455

690

4.93

15.22

FY09

5,740

730

5.21

14.38

FY10

8,500

1,100

7.86

9.55

FY11

13,000

1,650

11.81

6.30

Source: Fairwealth Securities Research Estimates

Fairwealth Securities

Page 4

Jaiprakash Associates - Buy Cement and Construction contributed to 90% of the firms standalone revenues while Real Estate, Wind Power and other divisions contributed remaining 10%.(See Table below)

Results Round up:

SEGMENT RESULTS Consolidated (Inc. Minority Share Holding) Quarterly Revenues(Rs. Crores Q3FY09 Q3 FY08 Growth(%)) Segments 200812 200712 Var (%) 200812 Sales Cement 577.3 500.4 15.4% Cement 577.33 500.39 15.38 155.16 Construction 751.7 440.3 70.7% Construction 751.7 440.32 70.72 91.94 Real 66.4 NA Hotel 7.31 8.46 -13.59 1.28 Hospitality 0 0 0 0 Total 1395.4 940.7 48.3% Hydro Electric 3.66 1.01 262.38 2.09 Source: Company Report & Wind Power Real Estate 66.43 0 0 27.23 Cement segment contributed to 45% of EBIT, though sharply down from ~55% for the same Investment 66.49 58.69 13.29 66.49 quarter last year, margins for the business saw TOTAL 1472.9 1008.9 46 344.19 a huge 630 bps drop. Construction segment Source: Capital Line, Company Reports. business saw increase in margins decline due to lower margins from Taj Express way project. Segmental Revenues-Stand Alone(Rs. Crores)

EBIT (Rs. Crores)

PBIT Margin (%)

Q3FY09 Q3FY08 Growth(%) Cement Constructio n Real Total

155.2

165.9

-6.4%

91.9

64.8

41.8%

27.2

-

NA

344.1 290.6 EBIT Margins(%)

18.9%

Cement

26.9%

33.2%

Construction

12.2%

14.7%

Real Estate

41.0%

NA

Total

19.7%

24.5%

Note: Segmental Numbers may not add up to combined results, these are only approximations. Source: Company Report

Fairwealth Securities

PBIT(Rs. Crore) 200712 Var (%)

Cement 26.88 33.15 Construction 12.23 14.72 Hotel 17.51 13.12 Hospitality 0 0 Hydro Electric & Wind 57.1 15.84 Power Real Estate 40.99 0 Investment 100 100 TOTAL 23.37 28.81 Source: Capital Line, Company Reports.

165.88 64.82 1.11 0 0.16

-6.46 41.84 15.32 0 1206.3

0 58.69 290.66

0 13.29 18.42

ROCE(%)

-18.91 -16.92 33.46 0

2.07 6.04 0.52 0

3.31 7.23 0.93 0

260.48

0.87

0.16

0 0 -18.88

6.7 1.76 2.51

0 2.27 3.18

-37.46 -16.46 -44.09 0 443.7 5 0 -22.47 -21.07

Although PBIT Margins for Cement segments were 27% versus 13% for Construction, but ROCE was 2%, versus 6% for Construction business. Reason for such mismatch is low capital expenditures in Construction projects as there are is low capital expenditures in Construction projects and huge capital requirements in Cement segment as capacity is being increased from 11.5 MTPA in FY08 to 25 MTPA by FY10E.

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Jaiprakash Associates - Buy

Financial Ratio Analysis: EBIT margins have increased over last 3 years, thanks to higher realisation in Cement and Construction business. Company’s Debt has increased over last 3 years, however Interest costs on Debt and total Interest dilution have gone down due to cheap, dollar and yen funding company availed during good times. Company’s interest cost stayed to a low of 4.6% for 2008. D/E ratio of 2.8 is expected for FY11 and interest cost of around 8%, company’s Interest dilution will rise to 5.8% and ROA after at same margins and turnover will fall to around 4%.

DuPont Analysis Year End

200803

200703

200603

a.OPM %

29

28

22

b. EBIT Margin %

24

23

17

0.35

0.45

0.49

8

10

8

e. Interest Cost %

4.59

5.34

6.92

f. Debt / Assets

c. Turnover / Assets d.ROA %

(d=b*c)

0.66

0.66

0.61

g. Interest Dilution % (g=e*f)

3.0

3.5

4.2

h.ROA after Interest %(h=d-g)

5.4

6.8

4.1

i. Assets / Shareholder Funds

2.98

2.91

2.57

j.ROE before other Inc% (j=h*i) k. Other Inc/Shareholders fund % l. RONW after Other % (l=j+k)

15

20

10

7

3

20

22

24

30

m. Tax Rate % n.ROE after Tax% (n=l(l*m/100) o. Book Value

27

33

16

16

16

25

33.22

116.95

99.77

5.35

18.67

25.05*

p. Earnings Per Share (p=n*o) Source: Capital Line

Status of company’s debt raised in form of Foreign Currency Convertible Bonds Issue Amount(I Conversi Shares As of Mar' 08) Size NR Rs. on Price (m) Crore) Converted Outstanding US$100 437.8 47 93 4,28.8 9.0 Euro165 US$400

885.7

111

79

8,34.8

50.9

1,614.0

248

65

18.2

1595.8

Source: Company Reports

Fairwealth Securities

Page 6

Jaiprakash Associates - Buy

Key Risks: Cement: Downward margin pressure on account of additional capacities and lower price realisations. Construction: Lower margins pressure on account of low margins in highway projects

• Highly leveraged balance sheet to adversely affect funding. On a consolidated basis company had Debt to Equity Ratio of 2.3 in FY08, which is expected to reach to a high of 2.8 by FY10. Also most of the funds to be raised further would be at higher interest rates from Indian Banks/ Institutions. However much of the company’s Debt (around 1600 crores), maturing in 2012 is in form of convertible Debenture and Warrants, convertible at Rs. 270, which will lower company’s Debt Equity Ratio. We do not see share prices rising to those levels before H2 2010. • Expiry of Cheaper Debt Funding in FY12 The company shall face much problems in arranging low cost funds as at present funds from FCCB are at less than 4% In case the conversion does not happen, problems are going to multiply as these are very cheap debt funding of less than 4% PA, and company will face difficulty in raising cheap funding or in cases where Government regulations against ECB hamper company’s growth potential. • Political Factors and Higher Business/ Unsystematic Risks: Various political factors in state of Uttar Pradesh can immensely hamper company’s growth projections and valuations as all the land bank is in that state and we put higher business risks attached to Real Estate business in state of Uttar Pradesh. Also a lot of construction and Cement plants of the company are in same state, so investors need to keep an eye on that too. • Weak business environment: Most of the company’s turnover comes from Cement, Construction, Real Estate and Hospitality business, all of which are highly capital intensive projects and are worst hit as credit crunch has hit these factors adversely from the supply as well as the demand side.

Stock Price of the company has fallen by 80% over last year, while S&P Nifty has fallen around 50% at its current price. We estimate diverse nature of Company’s business will help the company to whether the current downturn. Strong Q3 09 numbers should allay much of the fears of the investors about company’s future valuations and Earnings potential.

Fairwealth Securities Source: Capital Line

Page 7

Jaiprakash Associates - Buy

Value lies in Top Line Growth and Assets

Investment Rational

Top line growth of 40% CAGR expected.

Cement:

Margins to remain at similar levels.

Company plans to increase Cement capacity by 2.5 x from FY08 levels, which will lead to more than 100% rise in revenues by FY11E. Similar expansion is envisaged by several other players across the industry, while the supply will grow at more than 20%, demand will grow much slower as recession fears loom large. We expect cement prices to fall from these levels, leading to lower margins. Long term margins for the business will settle at around 20%.

Higher Revenue contribution from high margin Real Estate business, will act as a support to falling margins and bottom line.

Real Estate: Real Estate segment had high margins of 41%, segmental revenues were mere 8%, and going forward increase in segmental revenues will increase overall profitability for the business. Company has two major real Estate projects. 8mn sq. ft development at JP Greens-Noida. 6250 acres of land bank along Taj Expressway. Shareholding pattern: Jaiprakash Associates

Power Company has been the biggest hydropower player in the country, and has operated at significant higher margins. EBITDA margins stood at 35% in FY08 compared to 16% in FY06. BOOT power projects comprise 1700 MW. Company is expected to raise total capacity to 5000 MW Hydel (additional capacities to be commissioned by 2014).

Construction: • • Source: Company Reports, NSE.

•

Shareholding pattern has remained more or less unchanged.

•

Fairwealth Securities

Expressway: Taj Expressway and Ganga valley projects will be huge contributors. Hydro power: Combined order book of 2100 MW could add Rs. 8400 crores to order book. Irrigation: JP Associates won an order of Rs. 1950 crores. For 51 Km. long tunnel. Real Estate: Intersegment orders from Real Estate business would be significant contributor to this division.

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Jaiprakash Associates - Buy

Annexure: 1. Income Statement: PROGRESS AT A GLANCE OF LAST 5 YEARS(Rs. Crores) 200803 (12)

200703 (12)

200603 (12)

200503 (12)

4194.45

3930.62

3269.35

2997.75

Other Income

273.91

144.79

549.57

97.3

Total Income

4455.36

4149.51

3798.57

3145.11

Net Sales

Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Total Tax Net Profit before Minority Interest Minority Interest Net Profit after Minority Interest

2441.9

2504.23

2341.17

2143.39

2013.46

1645.28

1457.4

1001.72

601.55

496.95

397.13

422.56

1411.91

1148.33

1060.27

579.16

318.83

259.57

214.88

235.15

1093.08

888.76

845.39

344.01

296.13

247.28

150.06

137.32

796.95

641.48

695.33

206.69

120.15

88.22

60.67

0

676.8

553.26

634.66

206.69

Extraordinary Items

-12.72

-12.85

297.31

3.14

Adjusted Net Profit

689.52

566.11

337.35

203.55

6

6

6

2

5.34

4.87

5.81

2.21

EPS Adjusted EPS Adjusted(after minority Int) Source: Company Report, Capital Line

Company has not shown any significant Sales and Earnings jump up to 2008, with top line showing 11% CAGR. Bottom line has risen exponentially at a rate of 56% compounded annually.

Fairwealth Securities

Page 9

Jaiprakash Associates - Buy 2. Cash Flow Statement: Cash Flow Summary(Rs. Crore)

200803 Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities

200703

200603

200503

1823.0

1847.0

821.8

266.5

912.3

1099.6

218.1

261.4

Cash Flow From Operating Activities Net Profit before Tax & Extraordinary Items

1093.1

888.8

469.1

344.1

Depreciation

318.8

259.6

141.3

235.2

Interest (Net)

460.6

402.2

299.6

330.4

9.8

17

11.6

789.0

678.5

452.3

503.0

Op. Profit before Working Capital Changes

1882.0

1567.3

921.5

847.0

Working Capital Adjustments

-749.8

-226.9

-558.4

536.8

Cash Generated from/(used in) Operations

1132.2

1340.4

363.1

310.3

-220.0

-240.8

-144.9

-48.9

Total-others

-220.0

-240.8

-144.9

-48.9

Cash Flow before Extraordinary Items

912.3

Adjustment For

Others Total Adjustments (PBT & Extraordinary Items)

Direct Taxes Paid

Net Cash Used in Investing Activities

1099.6 4656.4

53.8

218.1 2411.2

261.4 -540.0

597.3

Cash Flow from Investing Activities Purchase and Sale of Fixed Assets

4690.3

2523.8

1021.5

653.1

Purchase and Sale of Investments

-112.6

-3.1

395.3

10.2

Interest Received

97.3

56.5

42.8

11.4

Others

49.0

Net Cash Used in Financing Activities

58.9 4383.3

43.3 1287.5

33.9 1347.1

891.2

Cash Flow From Financing Activities Proceeds: Proceeds from Issue of shares (incl share premium)

1202.9

98.8

330.0

436.3

Proceed from 0ther Long Term Borrowings

3403.6

1725.2

1204.0

963.9

Dividend Paid

-176.2

-81.4

-105.9

-32.2

Interest Paid

-557.9

-458.7

-342.4

341.8

Others

510.9

3.6

261.4

135.0

Net Cash Used in Financing Activities

4383.3

Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year Source: Company Report, Capital Line

Fairwealth Securities

1287.5

1347.1

891.2

639.2

-24.1

1025.2

555.3

2462.2

1823.0

1847.0

821.8

Page 10

Jaiprakash Associates - Buy 3. Balance Sheet: Balance Sheet Summary (Rs. Crore) 200803

200703

200603

200503

SOURCES OF FUNDS : Share Capital

234.3

219.2

215.1

176.2

Reserves Total Total Shareholders Funds

4344.4 4578.7

2709.3 2928.6

2390.8 2605.8

989.8 1166.0

Minority Interest Secured Loans

702.5

459.1

377.1

33.7

7796.7

6251.2

4854.1

4345.0

Non Convertible Debentures Term Loans Total Other/Misc Unsecured Loans Debentures / Bonds Deffered Tax and Liabilities Unsecured Loans Others Total Debt

796.3 6757.1

830.0 5082.5

1240.0 3394.3

1516.3 2612.3

243.3

338.0

217.1

209.1

3786.6 2816.9 111.9

1879.4 1356.8 68.1

667.7

1540.3 1010.9 47.0

313.7

684.6 436.3 38.9

390.9

158.4

11583.2

8130.6

6394.3

5029.5

Total Liabilities APPLICATION OF FUNDS :

16864.5

11518.2

9377.2

6229.2

Gross Block Less: Accumulated Depreciation

8822.3 1883.5 6938.8 6225.0

7709.0 1591.7 6117.2 2697.1

5671.1 1411.0 4260.1 2311.4

5089.1 1285.0 3804.1 1196.0

120.3

7.7

4.6

23.5

Inventories Sundry Debtors

1436.0 771.7

1203.7 741.6

1226.0 575.9

632.4 517.0

Cash and Bank Loans and Advances

2462.2 2721.2

1823.0 1307.7

1847.0 973.3

821.8 898.0

7391.0

5076.0

4622.2

2869.2

2767.2 481.4

1477.3 405.0

1109.4 245.6

1022.0 192.2

3248.6 4142.4

1882.3 3193.6

1355.1 3267.2

1214.2 1655.0

37.4 -599.5 16864.5

25.9 -523.3 11518.2

50.7 -516.8 9377.2

62.2 -511.6 6229.2

2022.2

1781.2

1914.5

1570.1

Net Block Capital Work in Progress Investments Current Assets, Loans & Advances

Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Net Deferred Tax Total Assets Contingent Liabilities Source: Company Report, Capital Line

Fairwealth Securities

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Jaiprakash Associates - Buy

Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale Thereof while this report is in circulation.

Fairwealth Securities

Page 12