Jaiprakash Associates Ltd _initiating Coverage (feb'09)

     Systematix   Institutional Research November 3,  INITIATING COVERAGE Engineering & Construction

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Bloomberg Reuters BSE Group BSE Code: NSE Symbol BSE Sensex NSE Nifty

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JPA IN JAIA.BO A 532532 JPASSOCIAT 9149 2785

Market Data Market Cap. (Rs. Mn.) Share Cap. (Rs. Mn.) 52 Wk High/Low Avg. Vol. (Weekly) Face Value (Rs.)

78078 2366 489 / 47 18681213 2

Shareholding Pattern (As on 31st December 2008)

Financials

FY08

(%)

FY09E

FY10E

Net Sales (Rs mn) 39,851

55,186

74,487

EBITDA (Rs mn)

10,970

13,939

19,380

PBT (Rs mn)

8,434

9,715

14,288

PAT (Rs mn)

6,097

6,846

9,420

EBITDA margin (%) 27.5%

25.3%

26.0%

PAT margin (%)

15.3%

12.4%

12.6%

EPS (Rs)

5.2

4.9

6.7

CEPS (Rs)

6.9

6.9

9.1

12.7

13.5

9.8

5.1

3.5

1.7

ROE (%)

16.3%

11.9%

13.0%

ROCE (%)

10.6%

8.8%

10.6%

P/E (x) EV/EBITDA (x)

Feb 09

 Jaiprakash Associates Ltd.

February 4, 2009

BUY (CMP: Rs.66)

Jaiprakash  Associates  Ltd  (JAL)  is  an  infrastructure  conglomerate,  all  set  to  gather  momentum  through  its  4  main  growth  engines  viz.  Engineering  &  Construction,  Cement, Power and Real Estate. The order book of JAL’s E&C division is USD8.55 bn,  23.7x times of its E&C division’s FY08 sales, unmatched by any player in the industry.  Similarly, JAL is likely to become India’s 3rd largest cement producer by 2010 with a  capacity  of  26.2mnT.  Further,  in  Power,  through  its  subsidiaries,  JAL  is  expected  to  add 7190 MW by 2016, taking its total capacity to 7890 MW.  Besides, JAL has also  forayed into sectors like steel and wind power, and has also entered into JVs for oil &  gas exploration, coal mining, and power transmission. Given its aggressive capex plan  of ~Rs.780bn (to be funded by equity contribution, debt and real estate offtakes) and  a  robust  E&C  order  book  (USD8.55bn),  JAL  seems  aptly  placed  to  capitalize  on  the  growth  opportunities  in  the  infrastructure  sector.  Going  forward,  monetization  of  available  land  from  Yamuna  Expressway  (272mn  sq.  ft.  with  FSI  of  1.5)  and  Ganga  Expressway  Project  (2.2  bn  sq.  ft.  with  FSI  of  1.5)  would  lead  to  significant  value  accretion for JAL. Initiate with BUY and a price target of Rs.117.  A robust order backlog – ensures company’s growth potential  Current  order  backlog  of  JAL  stands  at  USD8.55  bn,  which  is  23.7x  times  of  FY08  construction revenue. Almost 90% of total order backlog belongs to internal projects.  Howover  some  of  its  major  projects  are  yet  to  receive  financial  closures  viz:  Ganga  Expressway Project. The average execution period for entire projects falls between 36  to 48 months.   Huge Capacity expansion in Cement along with captive power  JAL is likely to become the 3rd largest cement company with a pan‐India presence over  FY10.  JAL  intend  to  add  8.9mnT  in  FY09E  and  8.3mnT  in  FY10E  taking  total  installed  capacity  to  26.2mnT  by  FY2010.  Considering  the  probable  demand‐supply  gap  in  the  cement sector, we conservatively estimate the total capacity to be 15mnT and 20mnT  in FY09E and FY10E respectively for our projections. It is also evident from that fact that  JAL  added  only  2.9mnT  of  capacity  in  first  9  months  of  FY09  against  an  anticipated  addition of 8.9mnT in FY09).  Yamuna Expressway project likely to contribute significantly to JAL’s earning growth  JAL has got 6250 acres of land under the subsidiary of Jaypee Infratech Ltd (JIL) in lieu  of  Yamuna  Expressway  Project  for  166  km.  The  land  is  spread  across  5  different  locations  in  NCR  and  UP.  As  on  date  JIL  is  having  ~1078  acre  of  land  in  physical  possession  at  Noida,  where  Land  use  plan  is  approved  for  entire  land  (1250  acres)   translating  82  mn  sq  ft  (FSI  =  1.5)  of  real  estate  development  primarily  consisting  of  Residential  (63%),  Institutional  (9%),  Commercial  (4%),  Roads  (12%)  and  Recreational  (12%).   Downside risk limited, we see immense value in the business: BUY  We  are  of  the  view  that  JAL’s  growth  prospects  are  still  intact  considering  its  robust  order backlog and new capacity additions in its various verticals. However the financial  closures for some of its projects are yet to be done. Further a land bank of 6250 acres  and  30,000  acres  that JAL’s  subsidiaries  got  in  lieu  of  Yamuna  Expressway  and  Ganga  Expressway  projects  respectively  in  locations  of  Noida  and  along  the  expressway  are  likely to enhance the valuation of JAL. We base our 12 months target of Rs.117 for JAL  based on SOTP methodology.   

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Table of Contents   Investment Case ............................................................................................................................................................................. 3  Valuations ...................................................................................................................................................................................... 6  Price Target Derivation ................................................................................................................................................................... 7  Industry Overview ........................................................................................................................................................................ 11  Cement ................................................................................................................................................................................................. 11      Energy & Power .................................................................................................................................................................................... 12  Company In‐depth ....................................................................................................................................................................... 14  An Overview ......................................................................................................................................................................................... 14  Segmental offerings ............................................................................................................................................................................. 14  Engineering & Construction ................................................................................................................................................................. 15  Cement ................................................................................................................................................................................................. 15  Energy ................................................................................................................................................................................................... 16  Real Estate  ........................................................................................................................................................................................... 16  Hospitality ............................................................................................................................................................................................ 17  Corporate Structure ............................................................................................................................................................................. 18  Subsidiaries  ......................................................................................................................................................................................... 19  Equity Outlook ...................................................................................................................................................................................... 19  Amalgamation ...................................................................................................................................................................................... 20  Earnings Outlook & Financials ...................................................................................................................................................... 21  9M & Q3FY09 Standalone Results Analysis ................................................................................................................................... 23  Financial Details ........................................................................................................................................................................... 25 

Binod Modi  [email protected]  (+91 22 6619 8264)   Feb 09

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                                                     INVESTMENT CASE  JAL,  an  infrastructure  conglomerate,  has  created  a  formidable  presence  across  various  segments  within  Infrastructure  space  over  the  years  and  is  known  for  its  execution  capability  and  rich  experience  across  sectors.  JAL  enjoyed  54%  market  share  in  10th  Five  Year  plan  in  Hydropower Projects and is considered an undisputed leader in Hydro Power Projects in India. It  is  aptly  placed  to  capitalize  on  the  upcoming  opportunities  in  Hydro  Power  Segment  (16,557  MW  capacities  are  estimated  by  Planning  Commission  to  be  added  in  11th  Plan).  Further  the  new capacities coming in Cement (17.2mnT till FY10), Power (7190 MW to be added till FY16)  along  with  monetization  of  land  bank  (6250  acres  received  from  Yamuna  Expressway  Project  and 30,000 acres received from Ganga Expressway Project) are likely to enhance the valuation  of JAL. Further with the entry into steel and wind power sector along with oil & gas exploration  (through a JV), coal mining, and power transmission business, JAL is likely to become a master  of all trades in the Indian Infrastructure space over the years. 

Our view on JAL is based on the following arguments:  Construction  Enjoys a leadership position in Hydro Power Construction  ƒ

JAL holds 54% market share in Hydropower Projects.  

ƒ

Considering  JAL’s  leadership  position  in  Hydro  power  segment,  it  is  likely  to  see  a  strong  order inflow on the wake of significant capacity addition for Hydropower (16,557 MW with  an estimated Cost of USD29bn) planned by Planning Commission of India in 11th Five year  plan. 

ƒ

JAL is likely to add 4620 MW Hydropower Capacity for its own plants in different locations  over  the  next  7‐8  years  through  its  different  subsidiaries.  This  entails  an  order  inflow  of  around ~Rs.320bn from its internal projects over the period. 

A robust order book – ensures company’s growth potential  ƒ

Current  order  backlog  of  JAL  stands  at  USD8.55  bn,  which  is  23.7x  times  of  FY08  construction revenue. 

ƒ

Almost  90%  of  total  order  book  belongs  to  internal  projects.  Howover  some  of  its  major  projects are yet to receive financial closures i.e. Ganga Expressway Project. 

ƒ

JAL’s  main  focus  is  on  the  construction  of  high  technology  and  high  margin  area’s  assignments like hydro power and river valley projects.  

ƒ

The average execution for entire projects falls between 36‐48 months once it commences.  And the margin from hydro power is between 18%‐20%. 

Fig 1: Current Order Backlog along with its peers

Order Book to Sales

Source: Company, Systematix Institutional Research

Feb 09

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Cement  Capacity expansion along with captive power  ƒ JAL is likely to become the 3rd largest cement company with a pan‐India presence over FY10.  JAL intents to add 8.9 mnt in FY09E and 8.3 mnt in FY10E taking total installed capacity to  26.2 mnt by FY2010.  ƒ We consider management’s estimates to be on the aggressive side in the current scenario (it  is visible as JAL added only 2.9 mnt of capacity in first 9 months of FY09 against anticipated  addition of 8.9 mnt in FY09). We believe its new upcoming capacities will be staggered over  a period of time.  ƒ We  have  estimated  the  total  capacity  to  be  15  mnt  and  20  mnt  in  FY09E  and  FY10E  respectively and same is taken in our projections.  ƒ JAL is also setting up captive power plants to support its aggressive expansion. In F2008, 89%  of its power requirements were met by captive power plants against ~73% in F2007, thereby  enabling a substantial reduction in costs (~ Rs.2 per unit).   ƒ After  commissioning  all  captive  power  plants  till  FY12E,  JAL  will  be  able  to  meet  ~87%  of  total power requirement from its captive power plant.   Table 1: Installed Capacity & Expected Production (In mnt) Year

FY-08 FY-09 FY-10 FY-11 FY-12

Installed Capacity (mnt)

Production

Captive Power Plant (MW)

9.00 17.90 26.20 32.80 32.80

6.77 8.08 18.05 24.50 32.80

88 MW 223 MW 340 MW 375 MW 375 MW

Source: Company

Sales tax and excise benefits available to the company  ƒ JAL gets sales tax benefits for intra‐state sales, which is typically around 40‐50%.   ƒ JAL’s  7  mnt  capacity  in  Himachal  Pradesh  enjoys  a  10‐year  excise  waiver  offered  by  the  government to industries set up in the state.   ƒ Further  3  mnt  capacity  in  UP  will  enjoy  10  years  sales  tax  benefit  alongwith  royality  exemption for limestone mining.  JVs to ensure flyash and land availability free of cost  ƒ JAL is setting up two cement units each in Bhilai and Bokaro under the JV with SAIL (74:26)  called Bhilai Jaypee Cement Ltd ( Cost of Project = Rs.6bn for 2.2 mnt) and Bokaro Jaypee  Cement Ltd (Cost of Project = Rs.4.05bn for 2.1 mnt).   ƒ Due to this, JAL will get slag and land free of cost.    Power  Baspa and Vishnuprayag plant are running to its capacity  ƒ Baspa (Jaiprakash Hydro Power Ltd.) and Vishnuprayag (Jaiprakash Power Venture Ltd.) are  running  to  its  capacity  with  more  than  99%  of  plant  availability  factor,  while  both  plants  operate at PLF of 54% and 56% respectively in FY08. And the IPP is based on 100% regulated  tariff.  ƒ Baspa  plant  (JAL  holds  63.3%)  contributes  an  ROE  of  24%  while  Vishnuprayag  plant  (JAL  holds 80.6%) generates 26% ROE (excluding VERs). 

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ƒ Jaypee Power Ventures Ltd (JPVL) gets Rs.20 crore (in lieu of 1.32 mn units) under Verified  Emission Reduction (VERs) every year from Vishnuprayag Plant.   ƒ Karcham  Wangtoo  Hydro  Power  plant  is  expected  to  have  Certified  Emission  Reduction  (CERs), which is in advanced stage and is likely to commission from 2011. As on date ~70% of  total civil construction part is done.  Huge capacity addition over the years  ƒ JAL is likely to add 7190 MW with an estimated cost of Rs.526bn by 2016 through different  subsidiaries. This includes Jaypee Nigrie Thermal (1320 MW) and Bina Power Thermal (1250  MW).  ƒ Karcham  Wangtoo  power  plant  (1000  MW)  is  likely  to  be  operational  from  FY12  and  Bina  (1250 MW) and Jaypee Nigrie Thermal plant (1320 MW) is estimated to become operational  from FY12 and FY13 respectively.    ƒ Karcham Wangtoo plant has acheived financial closure and now is under construction (~70%  is  completed  as  on  date),  while  Arunachal  Pradesh,  Meghalaya  are  in  various  stages  of  obtaining financial closures and statutory approvals.  ƒ The  proposed  power  generating  business  after  getting  fully  commissioned  is  likely  to  be  highly  profitable  due  to  42%  of  its  commissioned  capacity,  which  will  be  under  merchant  power tariff and the balance of 58% under the normal regulated tariff mechanism.  Table 2: Capacity Expansion in Power Business Project Basapa-II (JHPL) Vishnuprayag Karcham Wangtoo Jaypee Nigrie Thermal Bina Power Lower Siang Hirong Kynshi Stage-II Umngot Stage-I Total

Fuel

Capacity (MW)

Regulated Tariff (MW)

Merchant Power (MW)

VERs/CERs

COD

Hydro Hydro Hydro Thermal Thermal Hydro Hydro Hydro Hydro

300 400 1000 1320 1250 2400 500 450 270 7890

300 400 800 660 625 1200 250 225 135 4595

200 660 625 1200 250 225 135 3295

1.32 Mn VERs 3.35 Mn CERs CERs expected TBD TBD TBD TBD

2003 2006 2011 2012 2011 2015 2015 2016 2016

Source: Company

Yamuna Expressway Project – Real Estate   ƒ JAL’s  subsidiary  Jaypee  Infratech  Ltd  (JIL)  has  got  6250  acres  of  land  in  lieu  of  Yamuna  Expressway Project of 166 km. The land is spread across 5 different locations in NCR and UP.  ƒ JIL has got ~1078 acres of land in Noida in physical possession as on date.  ƒ Land use plan is approved for entire land of1250 acres translating into 82 mn sq ft (FSI = 1.5)  of  real  estate  development  primarily  consisting  of  Residential  (63%),  Institutional  (9%),  Commercial (4%), Roads (12%) and Recreational (12%).  ƒ In Yamuna Express JIL presold 4.7 mn sq ft of property as on Dec’08 and total collection from  this offtake is Rs.9.0bn.   ƒ Further in Jaypee Green JAL has presold 2.9 mn sq ft (out of 8 mn sq ft). The total collection  from the offtake is Rs.9.33bn. 

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Valuations  Longer end valuation looks attractive  

We expect revenue and earnings to post a CAGR growth of ~36.7% and ~24.3% respectively over the period FY08-10E.

We  are  of  the  view  that  JAL’s  growth  prospects  are  still  intact  considering  its  robust  order  backlog  and  new  capacity  additions  in  its  various  verticals.  However  the  financial  closures  for  some of its projects are yet to be concluded. Further a land bank of 6250 acres that JIL got in  lieu  of  Yamuna  Expressway  in  locations  of  Noida,  Agra  and  along  the  expressway  and  a  land  bank of 30,000 acres from Ganga Expressway Projects (Jaypee Ganga Infra. Corp. Ltd) are likely  to enhance the valuation of JAL.  JIL has already presold an area of 4.7 mn sq ft out of 5.8 mn sq  ft (available for sale) aggregating a value of Rs.28.0bn.     We  estimate  JAL’s  revenue  and  earnings  to  post  a  CAGR  growth  of  ~36.7%  and  ~24.3%  respectively  over  the  period  FY08‐10E.  We  expect  its  EBIDTA  margin  slightly  to  decline  from  27.5% in FY08 to ~26.0% in FY10E (a decline of 150 bps) mainly on account of increase in direct  construction,  manufacturing,  hotel  /  hospitality  and  power  cost  as  %  of  sales.  We  foresee  cement business margin to decline from 40.2% in FY08 to ~30.0% in FY10E mainly on account of  price  reduction  and  declining  utilization  level.  JAL’s  order  backlog  is  mainly  dominated  from  Hydro  power  projects  (Construction  of  Power  Stations)  which  ensure  comparatively  better  margins (~18‐20%) than other segments. Further, most of the contracts are internal contracts.   Table 3: Valuations

Price / Earnings (x) Price / CEPS (x) Price / BV (x) EV / EBIDTA (x) EV / Sales (x)

FY06

FY07

FY08

FY09E

FY10E

11.1 9.0 0.5 3.0 0.7

17.4 12.5 0.5 4.0 1.1

12.7 9.5 1.7 10.0 2.8

13.5 9.5 1.3 10.5 2.7

9.8 7.2 1.2 7.9 2.1

Source: Company, Systematix Institutional Research

Fundamentals are looking intact  We expect JAL, post amalgamation to report a standalone EPS of Rs4.9 and Rs6.7 for FY09E and  FY10E respectively. Furthermore its ROE is likely to decline from 16.3% in FY08 to 13.0%, while  the ROCE is expected to be stable at ~10.6% to that of FY08.   Table 4: Key Ratios (%) Revenue growth EPS growth EBITDA margin PAT Margin ROE ROCE

FY06

FY07

FY08

FY09E

FY10E

0.0% 0.0% 23.9% 19.3% 20.8% 13.2%

4.6% -36.4% 27.1% 11.9% 17.6% 12.7%

14.6% 37.5% 27.5% 15.3% 16.3% 10.6%

38.5% -6.1% 25.3% 12.4% 11.9% 8.8%

35.0% 37.6% 26.0% 12.6% 13.0% 10.6%

Source: Company, Systematix Institutional Research

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PRICE TARGET DERIVATION  We recommend 'BUY' on JAL with a 12 months price target of Rs117. Our 12‐month price target  is  based  on  SOTP  valuation  methodology.  We  have  valued  its  contracting  business  based  on  EV/EBIDTA methodology, while Cement business is valued based on EV/tonne method; we have  assumed industry EV per tonne at USD75 and 10% discount is given in our base case. Further  Power and Real Estate business is valued based on DCF and NPV methodology respectively.    

Price Target for JAL is Rs.117 in base case based on SOTP methodology

At CMP of Rs.66, JAL is trading at 13.5x and 9.8x FY09E and FY10E EPS respectively. In our view  this  leaves  enough  room  for  upside  given  the  strong  earnings  growth  projected  for  the  company, coupled with the growing investments in the segments as a whole.  Table 5: Details of Price target derivation Base Case Methodology

Bear Case Methodology

INR

INR

Cement

EV / tonne Total Installed Capacity = 20 mnt

42

EV / tonne (20% discount to Industry) Total Installed Capacity = 18 mnt

34

Construction Power Baspa Vishnuprayag Karcham Wangtoo Jaypee Nigrie Thermal Bina Power Thermal Real Estate Noida RE Agra RE Jaypee Green Total Less : Debts (Rs. Mn) Add : Cash

EV / EBIDTA

29

EV / EBIDTA (15% discount)

24

DCF, Cost orf Equity = 15% DCF, Cost of Equity = 15% DCF, Cost of Equity = 15% DCF, Cost of Equity = 15% DCF, Cost of Equity = 15%

5 10 11 4 6

DCF, Cost orf Equity = 20% DCF, Cost of Equity = 20% DCF, Cost of Equity = 20% DCF, Cost of Equity = 20% DCF, Cost of Equity = 18%

4 8 8 2 3

83055.8 18154.4

Hotels

2.8x time of FY10E revenue

NPV NPV NPV

35 10 7 159 58 13

Value Per Share (INR)

3

NPV NPV NPV

22 7 6 118 58 13

1.5x time of FY10E revenue

117

2 75

Source: Systematix Institutional Research

 

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Assumptions  9

For Cement business, we have considered the total installed capacity of 15 mnt and 20 mnt  in FY09 and FY10 respectively and reduced the utilization rate at 70% for FY10E.  

9

We have taken USD75 as EV per tone for the industry and 10% discount of industry EV per  tone is taken in our base case. 

9

We  have  used  CAPM  model  for  the  calculation  of  Cost  of  Equity  in  Power  Projects,  where  Risk Free Rate is taken at 8% while Market Rate of Return is kept at 14%. 

9

We  have  calculated  WACC  (~14.5%)  for  real  estate  valuation  based  of  CAPM,  where  Risk  Free Rate and Market Rate of Return are taken as 8% and 14% respectively.  

9

Perpetuity Growth rate is considered at 1%, while for Jaypee Nigrie growth rate is taken at  2%. 

9

In  Real  Estate,  we  have  reduced  the  price  by  ~10%  over  the  period  for  Noida  property  in  base case while 30% in Bear case and same is with Jaypee Green Project.  

9

While  for  Agra  we  have  slightly  increased  the  price  from  FY13E  considering  the  upcoming  urbanization in the area. 30% discount is taken in Bear case. 

9

We assumed that 1250 acres in Noida translates into 82 mn sq ft (we have 75 mn sq ft of  saleable area in our valuation considering some part of the land not to be developed) and  will complete till FY18E. Similarly for Agra (1250 acres) translated into 80 mn sq ft and will  completed till FY20E. 

9

For Jaypee green (8 mn sq ft) we assumed the project to complete till FY14E. 

9

We  tried  to  value  all  those  verticals  where  there  is  much  clarity  in  terms  of  business  and  financial  closures.  However  we  have  not  valued  Captive  Coal  Mines,  Jaypee  Ganga  Infrastructures,  Wind  Power  Projects,  Arunachal  Power  Projects  (2500  MW),  Meghalaya  Power  Projects  (720  MW),  Jaypee  Powergrid  Ltd,  Steel  Business,  Carbon  Credit,  Oil  Exploration Business.  

Yamuna Expressway real estate projects  Presently JIL has land use plan approved for entire 1250 acres at Noida translating 82 mn sq ft  of  real  estate  development.  However  JIL  is  currently  having  ~1078  acres  of  land  in  physical  possession against 1250acres of land. We assumed that total real estate development at Noida  is 75 mn sq ft of land and it will take 9 years to complete the project. We have discounted the  cash flow over the period with the WACC of 14.5%.   Similarly,  we  assumed  that  JIL  will  be  having  80  mn  sq  ft  of  developable  land  from  its  Agra  property (1250 acres of land). We expect this project to complete till FY20E. We have slightly  increased the price considering the upcoming urbanization is the area.                   

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Jaypee Greens  JAL is developing India’s first “golf centric” real estate project in Greater Noida. Total saleable  area for the project is 8 mn sq ft, which is spread over 450 acres. Already 2.9 mn sq ft of land  has  been  sold  as  on  date  with  an  average  realization  of  Rs.5873  per  sq  ft.  We  assumed  the  project to complete over FY14E. After discounting the cash flow over the period, the value per  share works out to Rs.8.  Table 6: Valuation of Jaypee Green

Agra (8 mn sq ft) Sales (mn sq ft) Selling Price (Rs/sq ft) Total Sales (Rs mn) Expenses Land Construction Cost Total Cost Taxes Net Cash Flow WACC Discount Rate PV of Cash Flow Total PV of Cash Flow Value Per Share

FY08

FY09E

FY10E

FY11E

FY12E

FY13E

FY14E

0.1 5873 587

0.2 5873 1175

1 5873 5873

1.25 5850 7313

1.5 5265 7898

2 5265 10530

1.95 5265 10267

1000 1500 250 111 226 14.5%

1000 1500 500 223 452 14.5% 1 452.0

1000 1500 2500 1113 2260 14.5% 0.87 1973.7

1000 1500 3125 1382 2806 14.5% 0.76 2140.0

1000 1500 3750 1369 2779 14.5% 0.67 1851.2

1000 1500 5000 1825 3705 14.5% 0.58 2155.6

1000 1500 4875 1779 3612 14.5% 0.51 1835.6

10408.1 8.1

Source: Systematix Institutional Research

                                       

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Risks to our Target Price  Among the potential risk factors to our target price we list the following as foremost:  1. Inability to fund its capex plan to delay the revenue intake: JAL is having a capex plan of  Rs.780bn (as per our estimates) to meet its expansion plans over the next 6‐7 years. Any  kind of inability or delay to fund the projects may adversely affect our target price.  2. Fluctuation in Raw Material prices can dampen the margins: Any adverse price fluctuation  of raw material prices could impact the construction margin of JAL.   3. Escalating  Competitive  scenario  can  play  spoil  sport:  The  construction  sector  is  highly  fragmented mainly on account of low capital intensity and low entry barriers. With increase  in the number of players and foray of smaller players into newer and bigger projects, the  construction  industry  is  facing  cut‐throat  competition  in  the  bidding  process.  This  adds  pressure on the margin with low quotes for good quality projects.   4. Unfavourable  changes  in  Government  Policy  can  create  headwinds  for  the  business:  Infrastructure  development  is  the  main  agenda  in  11th  Plan,  but  any  change  in  the  government’s policy might hurt the top line as well as bottom line of the JAL i.e. Section 80  IA,  what  we  saw  in  Budget  07‐08.  It  may  even  affect  inflow  of  foreign  capital  into  the  Infrastructure companies. However, we believe that this move is quite unlikely.  5. Travails  of  Hydro  Project  by  nature:  Hydro‐Power  Projects  are  invariably  located  in  Mountainous Regions and  have to face the direct challenges  from nature, such as fury of  flood, rock fall triggered by snowfall / rain.  6. Slowdown  in  Cement  sector:  The  current  prevailing  slowdown  in  cement  industry  and  a  fear of excess supply (we assume total capacity and demand to be 274 mnT and 224 mnT in  2012) may insist JAL to defer or prolong capacity addition plan going forward.  7. Uncertainty  in  real  estate  market:    If  the  bleak  situation  of  real  estate  market  prolongs  more  it  may  adversely  affect  the  off  take  and  realization  rate.  However  JAL  and  JIL  has  presold a substantial part of total available properties at the prevailing market rate, but if  market does not improve further and realization rate correct more than 30% (we assumed  30% correction in bear case), then our real estate valuation can have a negative impact.     

 

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INDUSTRY OVERVIEW  Infrastructure sector to grow at 15% CAGR in 11th Five Yr plan 

Infrastructure sector to grow at a CAGR of 15% in next 5 years

In order to save the economy from infrastructure hurdles and maintain its growth momentum,  an  adequate  provision  of  infrastructure  facilities  has  become  critical.  A  disruption  in  infrastructure  facilities  or  unreliable  services  may  inhibit  investments  in  productive  capital  or  restrict output. Even as a strategy for the revival of the Economy, stimulus packages are drawn  up  which  are  now  under  implementation.  Government  is  placing  a  major  thrust  on  the  Infrastructure Sector which will benefit JAL in a major way.  Engineering & Construction sector to be the biggest beneficiary of the infrastructure boom  In  India,  construction  is  the  2nd  largest economic  activity  after  agriculture.  The  investment  in  construction accounts for nearly 14% of India’s GDP, 50% of its Gross Fixed Capital Formation  (GFCF)  and  nearly  65%  of  the  total  investment  in  infrastructure.  Besides,  the  government’s  announcements  regarding  the  creation  of  a  financial  SPV  to  fund  infrastructure  projects  (utilizing up to 5% of forex reserves), viability gap funding, extension of PPP etc. would provide  a further impetus to this sector.   The revised draft of the Eleventh Plan Approach Paper states that investment in infrastructure  — defined as road, rail, air and water transport, power generation, transmission, distribution,  telecommunication, water supply, irrigation, and storage — would have to rise from the current  4.6 % of the country's gross domestic product (GDP) to an estimated 8.0 % during the Eleventh  Plan  period  to  meet  the  GDP  growth  target  of  8‐9  %.  The  total  investment  in  this  sector  is  estimated to be Rs6129bn in 11th five year plan.  Fig 2: Infrastructure Segmental Investment Outlook

Source: Crisil

Cement  The  cement  industry  accounts  for  approximately  1.2%  of  Gross  Domestic  Product  (GDP)  and  employs over 0.14 million people. It is a significant contributor to the revenue collected by both  the  central  and  state  governments  through  excise  and  sales  taxes.  India  is  the  second  largest  producer of cement in the world. In FY08, India produced 161 mn tn of cement, accounting for  6.4% of global cement production of 2.5 billion tonnes.     Cement  consumption  has  strong  co‐relation  with  economic  growth  and  industrial  activity.  In  particular, cement demand is particularly linked to construction activities. 

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Table 7: Performance outlook of Cement Industry Year

FY95

Capacity Installed Capacity Utilisation Additon Consumption Cement growth %

FY96

FY97

78.1 86.8 96.3 75% 74% 73% 6.9 8.7 9.5 58.4 64.5 70 7.90% 10.40% 8.50%

FY98

FY99

FY00

FY01

FY02

101.5 107.6 110.6 121.4 134.9 76% 76% 85% 77% 76% 5.2 6.1 3 10.8 13.5 76.7 81.7 94.2 93.6 102.4 9.60% 6.50% 15.30% -0.60% 9.40%

FY03

FY04

140.1 146.6 80% 80% 5.2 6.5 111.4 117.5 8.80% 5.50%

FY05

FY06

153.9 160 83% 96% 7.3 6.1 127.6 154 8.60% 20.70%

FY07

FY08

170 96% 10 163 5.80%

187 101% 17 188 15.30%

Source: CMA

Table 8: Expected Cement Capacity Addition for FY09E & FY10E (‘000 Tonnes)    ACC  Biral Corpn. Ltd  Century Textile Ltd  Grasim Ltd  Guj. Ambuja Cement  India Cement Ltd  J K cement  Jaypee  Kesoram Industries  Madras Cement  Orient Paper Inds  Others  Ultra Tech Cem Co Ltd.  Zuari   

FY 09E North  West  Central  East   South   ‐  ‐  ‐  ‐  ‐  1700  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  5700  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐     3500  2400  3000  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  2000  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  4900  ‐  ‐  ‐  ‐  ‐  10900  2400  3000  0  6900 

Additions

FY 10E

FY 09E  North  West  Central  East   South  ‐   ‐  ‐  ‐  ‐  3000  1700   ‐  ‐  ‐  ‐   ‐  0   ‐  2000   ‐  ‐   ‐   5700  4400      ‐   ‐   ‐  0  ‐  3300   ‐  ‐   ‐   ‐  ‐  ‐    ‐  ‐  1600  0  3000   ‐  ‐   ‐   ‐   8900  3700  2400  ‐   2200   ‐   0  ‐  ‐  ‐  1650  ‐  2000  ‐  ‐  ‐  ‐  2000  0  ‐  ‐  ‐  1000     0  2500   ‐  1500  ‐  ‐  4900     2000  ‐  ‐  ‐  0  ‐  ‐  ‐  ‐  2200  23200  13600  9700  1500  4850  8800 

Additions FY 10E  3000  0  2000  4400  3300  1600  3000  8300  1650  2000  1000  4000  2000  2200  38450 

Source: Systematix Institutional Research

Energy & Power   Currently India produces ~660bn KWh of electricity

Feb 09

India, with over a billion people, today only produces ~660 billion KWh of electricity and over  600  million  Indians,  a  population  equal  to  the  combined  population  of  USA  and  EU,  have  no  access to electricity, and limited access to other clean, modern fuels such as LPG and kerosene.  This constrained energy access is reflected in the relatively low Human Development Index of  India.  Enhancing  energy  supply  and  access  is  therefore  a  key  component  of  the  national  development  strategy.  However,  over  the  past  decade,  gains  in  both  poverty  reduction  and  economic  growth  have  been  significant  supported  by  energy  growth  though  it  has  been  significantly lower than the economic growth. 

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Table 9: Energy outlook of India and world

Energy Consumption (MTOE) Energy Mix (%) Coal Oil Natural Gas Nuclear Hydro Oil & Gas Imports (MTOE) - 2006 Growth in Energy (10 Yrs) Total Primary Energy Natural Gas

World

India

10878

423 (5th largest energy consumer)

28.4% 35.8% 23.7% 5.8% 6.3% 3264

56.2% 28.4% 8.5% 0.9% 6.0% 119

2.3% 2.7%

5.6% 9.4%

Source: Gail Presentation, BP Statistical Review of World Energy, June 2007

India’s  power  generation  is  estimated  to  grow  at  a  CAGR  of  12%  in  11th  Five  year  plan  to  maintain  its  GDP  growth.  Besides  100,000  MW  of  power  generation  capacity  is  likely  to  get  added in the country over FY07‐FY12 ensuring an estimasted capex of ~Rs200bn for civil works.  Furthermore  a  target  “Power  for  all”  in  11th  Five  year  plan  set  by  government  entailing    an  investment of ~Rs1000bn.  Fig 3: Projected Installed capacity in power sector

Power generation is expected to grow at a CAGR of 12% in 5 years

Capacity (MW)

424,744

450,000

360,000

305,623

270,000

180,000

219,992

132,329

90,000

0 2007

2012

2017

2022

 

Source: Industry

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COMPANY IN­DEPTH  An Overview 

JAL is a diversified industrial conglomerate having presence in Engineering & Construction, Cement, Power and Real Estate.

Jaiprakash  Associates  Limited  (JAL),  formerly  known  as  Jaiprakash  Industries  Ltd  (JIL)  was  incorporated  in  the  year  1986.  Today  JAL  is  a  well  diversified  infrastructure  industrial  conglomerate in India. It operates in its preferred businesses like Engineering and Construction  (Hydro  Power  Construction),  Cement,  Hydropower  generation,  Hospitality,  Real  Estate  Development,  Expressways  and  Highways.  In  Engineering  and  Construction  division  JAL  is  understood  as  a  pioneer  in  the  construction  of  multi‐purpose  river  valley  and  hydropower  projects. JAL is one of the largest cement producers in Central India with an installed capacity of  11.9  mnt.  After  having  strong  presence  in  hydro  power,  it  has  forayed  into  Thermal  Power  Generation, Power Transmission and Wind Power. It also owns and operates four 5 star hotels  and star Golf resorts at the Capital. 

Journey in brief  Fig 4: JAL’s milestone

Source: Company

Segmental Offerings  JAL provides different set of services on Engineering & Construction, Cement, and Hydropower  generation, Hospitality, Real Estate Development, Expressways and Highways.   Fig 5: JAL’s presence in different verticals

T&D

Source: Company

 

 

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Engineering & Construction:  JAL’s E&C division provides services to the construction of river valley and hydropower projects  on turnkey basis. It is currently executing 13 various projects in hydropower, irrigation & other  infrastructure  in  6  states.  Considering  the  immense  potential  present  in  the  hydro  power  generation, JAL forayed into power generation on Build Own Operate (BOO) basis. JAL till now  participated in 54% new hydro power projects in Tenth Five Year Plan. 

It is currently executing 13 various projects in hydropower / irrigation / other infrastructure fields in 6 states.

Table 10: Hydropower Capacity Commissioned by JAL from FY02-FY08 (8330 mw added to the National Grid) Name of Projec

Client & State/Country

2002-05 2005-06

2006-07

2007-08

2008-09

Total (MW)

BUILD-OWN-OPERATE Baspa

JHPL, H.P.

Vishnuprayag

JPVL, Uttranchal

300

300 400

400

ENGINEERING –PROCUREMENT –CONSTRUCTION (EPC) CONTRACTS Chamera-II

NHPC, H.P.

Omkareshwar

NHDC, M.P.

Baglihar

JKSPDC

300

300 520

520 450

450

CONTRACTS WITH VARIOUS GOVERNMENT AGENCIES Indira Sagar (Dam & Powerhouse)

NHDC, M.P.

1000

Nathpa Jakhari (Power House, Penstocks)

SJVNL, HP

1500

Dul-Hasti (Dam, Powerhouse & HRT)

NHPC, J&K

Tehri (Rock-fill Dam & Spillways)

THDC, Uttranchal

Teesta-V (Dam & Power House)

NHPC, Sikkim

Sardar Sarovar (Main Dam & PowerHouse)

SSNN, Gujarat

Tala (Powerhouse & HRT) Source: Company

THPA, Bhutan

1000 1500 390

390

1000

1000 510

250

510

1200

1450

1020

1020

Table 11: Major projects done in Engineering & Construction Project Title

Client

Description

Veerbhadra Barrage

Uttar Pradesh Govt

Built across the river Ganga for the Garhwal-Rishikesh-Chilla Hydel project.

Canal Head Powerhouse (Narmada)

Project in Gujarat

Construction of Sardar Sarovar Concrete Gravity Dam, Underground Powerhouse & 4 Rock fill Dams

Trunk Sewer,

Baghdad

Turnkey construction of a sewerage network in Baghdad including 26 Pump Stations.

Source: Company

Cement  Largest cement producer in central India and 4th largest cement producer in the country with an installed capacity of 9.9 mnt

JAL  is  the  largest  cement  producer  in  central  India  and  4th  largest  cement  producer  in  the  country with an installed capacity of 9.9 mnt. It has plans to enhance cement capacity to 28.3  mnt  by  end  of  FY10  and  33  mnt  by  end  FY11.  Thus,  it  is  likely  to  be  the  third  largest  cement  producer  in  the  country.  Its  current  capacities  are  located  at  Rewa  MP  (3  mnt),  Bela  MP  (2.4  mnt), Himachal Pradesh (1 mnt) and rest (3.53 mnt) in UP. JAL has market in different states like  Uttar Pradesh, Madhya Pradesh and Bihar, and also in North India, West India, West Bengal and  North East. Moreover, JAL is the largest exporter of clinker and cement to Nepal and Bhutan.  Table 12: Cement Plants with their Installed Capacities Places

mnt

Rewa MP Bela MP Sadva Khurd UP Tanda UP Chunar UP Panipat Hariyana Sidhi Total current capacity

3.0 2.4 0.6 1.0 1.5 1.4 2.0 11.9

Source: Company

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Energy (Hydro Power)  JAL has so far distinctly participated 54% of new hydropower projects in 10th Five Year Plan

JAL is one of the largest private power producers in the country with 89% market share. After  establishing  a  strong  presence  in  the  Hydro‐Power  Sector  it  has  made  an  entry  into  Thermal  Power  Generation,  Power  Transmission  and  also  forayed  into  Wind  Power.  To  capitalize  the  vast  potential  opportunities  in  hydro  power  generation,  JAL  ventured  into  private  power  generation on BOO basis. JAL has so far distinctly participated 54% of new hydropower projects  in 10th Five Year Plan. As an independent power producer JAL along with its subsidiaries and JV  partners has 9 BOO projects in hand out of which Baspa and Vishnu Prayag have already been  commissioned, while Karcham Wangtoo is currently under execution.   Further it has also made a presence in Wind Turbine Generator with an installed capacity of 49  MW (40.25 MW in Maharashtra and 8.75 WM in Gujarat). The electricity generated being sold  to MSEDC in Maharashtra and in Gujarat to GUVNL.  

Table 13: A snapshot of JAL’s commissioned power plant Project Title

Client

Description

Baspa Hydroelectric Project 300mw

Govt of Himachal Pradesh

India's Largest Private Sector Hydro-Power Project on BOO basis was commissioned on June 2003 at a project cost

Vishnu Prayag Hydroelectric Project 400 mw

Govt of Uttarakhand

It is a BOO project commissioned in Oct 06, located across the Alaknanda, has an underground power station. The

of Rs 16247 mn and has since been generating power.

project cost is Rs316940mn

Source: Company

Real Estate   Yamuna Expressway Project  JAL has been awarded Yamuna Expressways project on BOT basis last year. Yamuna Expressway  with  a  length  of  165  km,  6  lane  super  expressway  between  Noida  and  Agra  is  estimated  an  outlay of Rs.60bn. The concession period for the project is for 36 years. Along with this, Jaypee  Infratech  Ltd  has  received  6250  acres  of  land  (272  mn  sq  ft)  in  different  locations  like  Noida,  Agra and land along the expressway to develop residential/industrial/institutional purposes.   Table 14: Location wise land for real estate development    Locations Noida Dhankaur Mirzapur Tappal Agra

Area (acres) 1250 1250 1250 1250 1250

Source: Company 

Ganga Expressway Project  This  is  the  largest  private  sector  infrastructure  BOT  project  in  India  awarded  to  JAL  last  year.  This  is  1047  Km  expressway  in  UP  along  the  left  bank  of  the  river  Ganga  connecting  Greater  Noida to Ballia. The estimated cost for the project is Rs.600bn while the concession period is 35  years.   Following  the  Yamuna  Expressway  model  JAL’s  100%  owned  subsidiary  Jaypee  Ganga  Infra.  Corp.  Ltd  has  got  the  right  to  develop  of  an  estimated  30000  acres  of  land  along  the  Expressway.  JAL  has  given  us  to  understand  that  the  total  real  estate  developable  area  is  translated to 3.3 bn sq ft after considering the FSI of 1.5. Moreover around 18000 acres of land  lies  in  Etah,  which  is  160  km  away  from  Delhi.  Etah  is  considered  as  one  of  the  premium  locations in UP. 

   

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Jaypee Green  JAL has diversified its interest in the development of real estate with a different kind of passion.  The main idea was to give the residents a feel of resort living at the Jaypee Greens residential  community.  Jaypee  Greens  Greater  Noida  was  India’s  First  Golf  Centric  integrated  township  spread 450 plus acres of land comprising one 18 hole and two 9 hole golf facility. It caters to the  high‐end  consumers  and  also  to  the  mid  segment  of  the  society  with  various  facility  like  commercial  complex,  medical  facilities,  educational  facilities  that  range  from  Kindergarden  to  Pre‐university levels, host of recreational facilities like social clubs, entertainment zone etc. 

Hospitality  JAL owns and operates four 5 star hotels, 2 in the national capital, New Delhi and one each in  Agra and Mussorrie and also a five star Golf resort at Greater Noida, with a total capacity of 750  rooms.   Table 15: Jaypee Hotel Ltd Jaypee Hotel Ltd

Room Available (Inventory)

Avg Room Rate per day

Occupancy rate

99 120 350 180

9000 8500 9500 8500

82% 80% 82% 80%

Hotel Siddharth, Delhi Hotel Basant, Delhi Hotel Jaypee Palace, Agra Jaypee Residency Manor, Agra Source: Company

Power Transmission – Jaypee Powergrid Ltd (JPL)  JPL  a  JV  (51:23:24)  between  Jaiprakash  Hydro  Power  ltd  (51%),  JPVL  (23%)  and  Powergrid  Corporation of India Ltd (26%) is setting up a Transmission Line for evacuation of power from  the  Karcham  Wangtooproject.  Central  Electricity  Regulatory  Commission  has  already  granted  Transmission License to the entity. The proposed transmission line of 234 km will be a 400kV  inter‐state  line  connecting  Jaiprakash  Power  Ventures  Ltd's  Karcham  Wangtoo  project  to  the  400/200kV substation of PGCIL at Abdullapur in Yamuna Nagar district of Haryana. Power will  be supplied to Himachal Pradesh, Haryana, Punjab, Uttar Pradesh and Rajasthan.  

Iron and Steel (Malvika Steels Ltd.)  JAL has taken possession of the assets of Malvika Steels Limited at Jagdishpur in UP with a cost  of  Rs.2070mn,  which  was  put  up  for  sale  through  an  open  auction  by  the  Debt  Recovery  Tribunal (DRT). This acquisition and revival of the Steel Plant would be a step in the direction of  backward integration. JAL has chalked out a plan to commission a 5.5 lakh tonne per annum pig  iron  facility  at  Jagdishpur  by  March  2009  with  an  additional  investment  of  Rs.12bn  and  production of longs would begin by March 2010. 

Wind Power Plant  JAL has fully commissioned its Wind Turbine Generators with an aggregate capacity of 49 MW  (40.25 MW in Maharashtra and 8.75 MW in Gujarat) as on March 2008 with a cost of Rs.2.4bn.  Out of the total installed capacity of 49 MW, 16.25 MW (13 Generators, each with a capacity of  1.25 MW) was commissioned at Dhule, Maharashtra during December 2006 to March 2007. The  remaining 32.75 MW was commissioned at Sangli, Maharashtra (24 MW ‐ 16 Generators, each  with a capacity of 1.5 MW) during September 2007 to March 2008 and at Kutch, Gujarat (8.75  MW ‐ 7 Generators, each with a capacity of 1.25 MW) in March 2008. The electricity generated  is  being  sold  to  Maharashtra  State  Electricity  Distribution  Company  Ltd.  in  Maharashtra  and  Gujarat Urja Vikas Nigam Limited in Gujarat. 

   

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Oil and Natural Gas  JAL recently entered into oil and natural gas business  by picking up a 45% stake held by ICICI  Bank  and  ICICI  Ventures  in  Prize  Petroleum  Corporation  Ltd,  a  subsidiary  of  Hindustan  Petroleum Corporation. The GoI has awarded the South Reva Basin in MP with an approximate  area  of  13,000  sq  Km  for  exploration  and  development  of  on‐shore  Oil‐Gas  Block  to  the  consortium  of  JAL  and  Prize  Petroleum  Corporation  Ltd  (PPCL).  JAL  has  90%  stake  in  the  JV,  while PPCL is having 10%. PPCL enjoys a vast experience in the field of Oil and Gas exploration  and will act as the Operator.   Fig 6: Corporate Structure of JAL

Source: Company

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Table 16: JAL’s subsidiaries with their respective business activities Subsidiaries

Business activities

Jaiprakash Hydro-Power Ltd (63.34%)

300 MW Baspa Power Station

Jaiprakash Power Ventures Ltd (80.56%)

400 MW Vishnuprayag Power Station

Jaypee Karcham Hydro Corporation Ltd (100%)

Karcham Wangtoo Hydro-electric Project (1000 MW)

Jaypee Powergrid Ltd (74%)

JV between Jaiprakash Hydro-Power Ltd and Powergrid Corporation of India Limited is setting up the Transmission Line for evacuation of Power from the Karcham Wangtoo Project.

Madhya Pradesh Jaypee Minerals Ltd (70%)

MPJML, a JV with Madhya Pradesh State Mining Corporation Limited (MPSMCL), to develop and mine coal from the

Jaypee Infratech Ltd (98.96%) w.e.f. 05.04.2007

A wholly owned subsidiary for implementation of 160 km long 6-lane Taj Expressway Project BOOT basis.

Bhilai Jaypee Cement Ltd (74%) w.e.f. 11.04.2007

BJCL,a Joint Venture between the Company and Steel Authority of India Ltd. (SAIL) to set up a 2.2 million tonne per

Himalyan Expressway Ltd (100%) w.e.f. 25.05.2007

Zirakpur- Parwanoo Road Project in the States of Punjab, Haryana and Himachal Pradesh on BOT basis under

Coal Block at Amelia (North) in M.P.

annum capacity, located at Bhilai in Chattisgarh and at Babupur, Satna in Madhya Pradesh.

NHDP Phase-IIIA Gujarat Jaypee Cement & Infrastructure Ltd (100%) w.e.f. 26.12.07

Agreement with Gujarat Mineral Development Corporation Limited (GMDCL) to set up 2.4 mn tones pa Cement manufacturing plant with captive power station and captive Jetty in Kutch Distt. of Gujarat.

JPSK Sports Pvt Ltd (61.70%a) w.e.f. 07.03.2008

for developing a Greenfield state-of-the-art Sports Complex including Car Race track suitable for Formula One race with related integrated support infrastructure including Township(s) and auxiliary facilities

Bokaro Jaypee Cement Ltd (74%a) w.e.f. 13.03.2008

The second JV between the Company and SAIL with management to set up a 2.1 mn tone pa capacity Cement Plant

Jaypee Ganga Infrastructure Corp Ltd (100%) w.e.f. 18.03.2008

Connects Greater Noida with Ghazipur- Ballia, Ganga Expressway Project.

at Bokaro in Jharkhand.

Source: Company

Equity History  Table 17: Equity Outlook Date 3/31/1999 9/30/2000 3/31/2002 FY05 FY06 FY07 FY08 FY09 till date FY09E FY10E

Reason

Equity Capital (mn)

As per Annual Report Private Placement Equity Share Issued Share Issued on Amalgamation Bond Conversion Bond Conversion Bond Conversion Bond & Warrant Conversion Share Issued on Amalgamation & Warrant Conversion (40 mn) Bond Conversion (FCCB)

675.0 2000.0 2090.0 881.1 950.9 1096.2 1171.5 1183.5 1441.5 1506.0

Source: Company, Systematix Institutional Research

       

         

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Recent Amalgamation  JAL  has  approved  the  amalgamation  of  Jaypee  Cement  Ltd  (JCL),  Gujarat  Anjan  Cement  Ltd  (GACL), Jaypee Hotels Ltd (JHL) and Jaiprakash Enterprises Ltd (JEL)) with Jaiprakash Associates  Ltd, with effect from April 01, 2008. This amalgamation is basically done to get the synergy for  itself  as  the  cross‐holding  of  companies’  shares  will  be  transferred  to  a  trust.  The  benefit  of  shares held in the trust shall accrue to Jaiprakash Associates Ltd.    

Benefits of post amalgamation  9 9 9 9

Merger will bring cement business under one roof.  This will help company effectively deal with demand‐supply mismatch in different regions.  Move will help company avoid dividend distribution tax.  Increase in equity base will resolve the funding issue of JAL to a certain extent. 

Table 18: Post amalgamation Shares Issuances and Treasury Stock O/s Equity (mn) JAL JCL GACL JHL JEL

Current (mn)

Current Ownership

1183.5 506 350 55.5 26.7

Shares Held by JAL

100% 95% 72% 0%

506 333 40 0

Swap ratio

Shares Issuance (mn)

1:10 1:11 1:1 3:1

Treasury Stock (mn)

1223.5 51 32 55 80 218

51 30 40 80 201

Post Amalgamation (mn) 1183.5 51 32 55 80 1402

Source: Company, Systematix Institutional Research

Table 19: JAL’s shareholding post amalgamation (mn)

Pre Amalgamation

% Shareholding

Post Amalgamation

536 0 648 1184

45% 0% 55% 100%

536 201 665 1402

Promoters Trust Public

% Shareholding 38% 14% 47% 100%

Source: Company, Systematix Institutional Research

       

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EARNINGS OUTLOOK & FINANCIALS  Standalone revenue to grow at a CAGR of ~36.7% over FY8‐10E  JAL’s standalone revenue is estimated to grow at a CAGR of ~36.7% over FY08-FY10E

JAL’s standalone revenue is estimated to grow at a CAGR of ~36.7% over FY08‐FY10E mainly on  account  of  substantial  contribution  from  Cement  and  Construction  segment.  Cement  and  Construction revenue is estimated to grow at a CAGR of ~26.8% and ~39.2% respectively over  FY08‐FY10E.  Table 20: Sales Growth- heading to a northward journey Sales

FY06

Cement Sales (Net) % net sales % yoy growth Construction Revenue % net sales % yoy growth Real Estate Revenue % net sales Hotel / Hospitality Revenue % net sales % yoy growth Power % net sales % yoy growth

12,206.3 36.7% 19,206.7 57.8% 0.0% 1,832.1 5.5% 0.0%

FY07 18,185.1 52.3% 49.0% 16,107.2 46.3% -16.1% 0.0% 293.5 0.8% -84.0% 64.6 0.2%

FY08E 19,023.9 47.7% 4.6% 17,301.9 43.4% 7.4% 2,558.3 6.4% 305.8 0.8% 4.2% 181.1 0.5% 180.3%

FY09E

FY10E

24,135.3 43.7% 26.9% 25,432.5 46.1% 47.0% 2,936.5 5.3% 1,877.3 3.4% 513.9% 300.5 0.5% 65.9%

30,571.3 41.0% 26.7% 33,545.0 45.0% 31.9% 5,873.0 7.9% 3,621.1 4.9% 92.9% 321.9 0.4% 7.1%

Source: Company, Systematix Institutional Research

EBIDTA margin and net margin to decline  We expect the operating margin to see a decline mainly on account of margin contraction from  cement  business  along  with  the  increase  in  direct  construction  cost.  EBIDTA  margins  are  expected to decline from 27.5% in FY08 to ~26.0% in FY10 (a decline of 150 bps). Further JAL’s  net profit is expected to grow at a CAGR of ~24.3% over FY08‐FY10E, but net margin is likely to  decline    from  ~15.3%  in  FY08  to  12.6%  in  FY10E  (a  decline  of  270  bps)  mainly  on  account  of  higher interest cost and tax expenditures (we assumed full tax rate). We assumed real estate  prices  to  decline  almost  by  ~25  by  FY10.  However  JAL’s  has  presold  a  substantial  part  of  its  Jaypee Green property at higher prevailing rate, so we do not expect its real estate margin to be  be affected at the initial years of revenue recognition.  Fig 7: EBIDTA margin outlook

Fig 8: Net margin outlook

  

 

Source: Company, Systematix Institutional Research

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Debt Equity still to provide leveraging opportunity  We expect JAL should not have any issues to raise loans to funds its upcoming projects once lending scenario improves

Debt Equity ratio that merits attention to most of the lenders in present scenario is quite benign  for JAL which stands at 1.5x times in the current year. We expect JAL should not have any issues  to raise loans to fund its upcoming projects once lending scenario improves.   Fig 9: Debt / Equity scenario 

Source: Company, Systematix Institutional Research

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9M & Q3FY09 STANDALONE RESULTS ANALYSIS  ƒ

Jaiprakash  Associates  Ltd.  (JAL)  has  reported  a  standalone  topline  growth  of  ~46%  at  Rs.13806.3mn  on  yoy  basis  mainly  because  of  its  brisk  execution  in  construction  activities (construction segment revenue posted a growth of 71% on yoy basis).  

ƒ

Operating profit has grown from Rs.2659.1mn to Rs.3062.0mn in Q3FY09 on yoy basis  (a  growth  of  15.2%),  while  EBIDTA  margin  has  significantly  decline  from  29.6%  in  Q3FY08  to  23.2%  in  Q3FY09.  This  is  on  account  of  significant  jump  in  Employee  Cost  and Direct Manufacturing Cost. 

ƒ

Whereas on 9 months basis EBIDTA margin stands at 28.6% ( a decline of 130 bps on  yoy  basis),  which  is  mainly  on  account  of  the  strong  operating  margin  posted  by  construction segment in previous quarters (Construction segment had posted an EBIT  margin of 31.2%). 

ƒ

Net  Profit  has  grown  marginally  by  6.2%  on  yoy  basis  at  Rs.1655.1mn,  whereas  net  margin declined by 480 bps at 12.5% in Q3FY09. While on 9 months basis net margin  stands at 13.6%. 

ƒ

Earning Per Share (Basic) of JAL has net seen any growth and stands at Rs.1.41, whereas  in 9 Months basis EPS (Basic) has posted a growth of ~18% at Rs.4.22 on yoy basis. 

ƒ

Cement segment’s EBIT has posted a degrowth of 7%, while Construction segment EBIT  has grown by ~42% on yoy basis.  

ƒ

Real  Estate  segment  have  been  the  prominent  performer  for  the  quarter  which  maintained  an  EBIT  margin  of  ~41%  for  the  quarter,  while  the  EBIT  stands  at  Rs.272.3mn, which is ~11% of total EBIT reported by JAL. 

Table 21: 9M & Q3FY09 result (Rs in mn)

Q3FY09

Q3FY08

% yoy growth

9MFY09

Net Sales Other Operating Income Total Income Expenditures (Increase) / Decrease in WIP Dicrect Const., Mfg, Hotel/Hospitality and power Expenses Employee Cost Other Expenditures Total Expenditures EBIDTA EBIDTA margin (%) Depreciation EBIT EBIT margin (%) Interest Other Income PBT Tax % Tax PAT Net Margin (%) EPS (Basic) EPS (Diluted)

13216.9 589.4 13806.3

8997.9 430.9 9428.8

46.9% 36.8% 46.4%

36530 1372.7 37902.7

27047.1 1113.9 28161.0

35.1% 23.2% 34.6%

16.8

-247

-106.8%

-126.2

-86.1

46.6%

7548.2 1226.7 1952.6 10744.3 3062.0 23.2% 646.1 2415.9 18.3% 991.7 664.9 2089.1 434 20.8% 1655.1 12.5% 1.41 1.29

4969.2 570.8 1476.7 6769.7 2659.1 29.6% 511 2148.1 23.9% 787.9 586.9 1947.1 389 20.0% 1558.1 17.3% 1.4 1.36

51.9% 114.9% 32.2% 58.7% 15.2%

19690.1 2648.7 5244.1 27456.7 10446.0 28.6% 1934.3 8511.7 23.3% 2983.5 1316 6844.2 1885.2 27.5% 4959.0 13.6% 4.22 3.88

13637.1 1870.6 4642 20063.6 8097.4 29.9% 1422.5 6674.9 24.7% 2418 1122.6 5379.5 1386.9 25.8% 3992.6 14.8% 3.59 3.49

44.4% 41.6% 13.0% 36.8% 29.0%

26.4% 12.5% 25.9% 13.3% 7.3% 11.6% 6.2% 0.7% -5.1%

9MFY08

% yoy growth

36.0% 27.5% 23.4% 17.2% 27.2% 35.9% 24.2% 17.5% 11.2%

Source: Company

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Table 22: Segmental revenue break up

Cement Construction Wind Power Hotel/Hospitality Real Estate Investments Unallocated Total Less : Inter-Segment Revenue Total Income

Q3FY09

Q3FY08

% yoy growth

9MFY09

5773.3 7517 36.6 73.1 664.3 664.9 71.3 14135.6 329.3 13806.3

5003.9 4403.2 10.1 84.6 0 586.9 148.5 9650.3 221.5 9428.8

15.4% 70.7% 262.4% -13.6% 13.3% -52.0% 46.5% 48.7% 46.4%

16809.4 19346.6 236.7 225 1677 1316 415.1 38709.8 807.1 37902.7

Q3FY09

Q3FY08

% yoy growth

9MFY09

1551.6 26.9% 919.4 12.2% 20.9 57.1% 12.8 17.5% 272.3 41.0% 664.9

1658.8 33.2% 648.2 14.7% 1.6 15.8% 11.1 13.1% 0

-6.5%

4662.6 27.7% 4077 21.1% 149.3 63.1% 24.3 10.8% 644.8 38.4% 1316 100.0%

9MFY08 14738.7 13200.3 75.9 249.3 0 1122.6 536 28800.2 639.2 28161

% yoy growth 14.0% 46.6% 211.9% -9.7% 17.2% -22.6% 34.4% 26.3% 34.6%

Source: Company

Table 23: Segmental EBIT margin

Cement Margin Construction Margin Wind Power Margin Hotel/Hospitality Margin Real Estate Margin Investments Margin

586.9 100.0%

41.8% 1206.3% 15.3%

13.3%

9MFY08 4822.7 32.7% 2369.1 17.9% 43.8 57.7% 29.4 11.8% 0 1122.6 100.0%

% yoy growth -3.3% 72.1% 240.9% -17.3%

17.2%

Source: Company

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  FINANCIAL  DETAILS  Profit & Loss Statement (Rs mn)

Net Sales

Balance Sheet (Rs mn) FY06

FY07

FY08

FY09E

FY10E

33,245.1

34,779.2 39,851.1

55,186.4

74,487.2

15%

38%

35%

25,301.2

25,352.4 28,881.0

41,247.3

55,107.1

Total Shareholder's funds

7,943.9

9,426.8 10,970.1

13,939.0

19,380.1

Secured Loans Unsecured Loans Total Debt

% yoy growth Total Cost EBIDTA EBIDTA Margin (%)

5%

Reserves & Surplus

FY08

FY09E

FY10E

2,150.6

2,192.4

2,343.0

2,802.9 2,802.9

24,671.4

26,537.1

39,652.0

65,910.8 73,386.8

-

3,985.0

26,822.0

28,729.5

45,980.0

68,713.7 76,189.6

27,213.8

36,859.5

46,403.0

65,874.9 69,874.9

14,984.0

18,071.6

36,652.8

38,652.8 39,652.8

42,197.8

54,931.1

83,055.8 104,527.7 109,527.7

Equity Warrants Upfront Payment

-

-

-

27.5%

25.3%

26.0%

1,514.6

1,630.5 2,033.0

2,852.6

3,389.8

Interest

2,397.4

2,572.5 3,391.4

4,181.1

5,476.4

Deferred Tax Liability

4,901.8

4,994.3

-

975.3 2,887.8

2,809.5

3,774.6

TOTAL LIABILITIES

73,921.6

88,654.9

4,031.9

6,199.1 8,433.5

Gross Block

36,637.6

42,019.3

51,662.4

82,564.8 90,467.2

PBTA Amortization of Tools PBT

27.1%

Share Capital

FY07

Depreciation Other Income

23.9%

FY06

4,031.9

Profit on sale of shares of JHPL 3,613.7 Tax

30.9%

Net Profit

-

6,199.1 8,433.5

9,714.8

14,288.4

-

-

-

2,050.1 2,336.8

2,868.6

4,868.2

27.7%

29.5%

34.1%

4,149.0 6,096.7

33.1%

6,399.9

YoY Growth (%) Net Profit Margin (%)

14,288.4

-

-

1,245.7

% Tax

9,714.8

-

-

19.3%

6,846.2

9,420.3

-35%

47%

12%

38%

11.9%

15.3%

12.4%

12.6%

Depreciation

11,960.9

12,799.7

14,547.3

17,399.9 20,789.7

Net Block

24,676.7

29,219.6

37,115.1

65,164.9 69,677.4

8,760.6

21,862.0

42,190.1

54,847.1 60,331.8

15,570.4

17,787.4

32,248.3

27,823.6 27,823.6

CWIP Investments Deferred Tax Asset Inventories Sundry Debtors

4,031.9

Depreciation / Amortisation

1,548.6

Increase in Borrowings Loss on sale of Fixed Assets

5,861.8

8,435.5 11,343.8 22,440.9 20,143.2

9,117.9

10,985.0

22,219.4

25,030.1 26,684.5

34.0

125.3

319.0

6,111.3

5,004.0

3,261.7

3,597.4 3,988.6

Total Current Assets

42,198.3

42,994.5

59,629.3

73,535.5 80,970.9

Current Liablities

15,368.8

20,262.4

33,490.9

38,339.6 42,273.3

1,990.3

3,040.7

3,060.5

3,459.5 3,564.5

24,839.2

19,691.4

23,077.9

31,736.5 35,133.1

5.1

1.4

1.0

Others

73,921.8

88,655.0

FY06

FY10E

6,199.1

8,433.5

9,714.8

14,288.4

1,664.3

2,072.7

2,852.6

3,389.8

Provisions Net Current Assets

2,572.5

3,391.4

4,181.1

5,476.4

176.4

171.8

-

-

(1,592.3)

(947.4) (2,683.2) (3,990.2) (6,464.2)

Cash before working capital changes

6,548.7

9,664.9

Increase/(Decrease) in WC

(2,351.6)

103.8

Cashflow from operations

4,197.1

9,768.7

Direct Tax Paid FBT paid

11,386.2

12,758.3

16,690.5

332.0 (4,771.1) (5,799.3) 11,718.2

7,987.3

10,891.1

(1,240.1) (1,981.1) (1,641.3) (2,043.0) (3,692.1) -

-

-

-

-

2,957.0

7,787.6

10,076.9

5,944.3

7,199.0

Net Cash used in Operating Activities Capital expenditure Other Investing activities Cashflow from investing Increase in capital Increase in Security Premium Increase in borrowings Repayment of Borrowings Other financing activities

(6,920.7) (19,586.1) (30,701.3) (40,657.0) (10,484.7) 4,539.5 (1,172.1) (11,551.4)

7,234.2

3,774.6

(2,381.2) (20,758.2) (42,252.7) (33,422.8) (6,710.2) 139.6

41.8

150.6

459.8

-

3,160.4

946.4

8,366.8

-

-

20,328.9

25,094.2

45,505.0

21,471.9

5,000.0

(11,561.7) (12,167.1) (17,380.4) (4,067.2)

(306.5)

(3,269.7) (3,344.6)

(609.9)

13,900.5 (7,480.0)

Cashflow from financing

8,797.5

10,570.7

36,032.1

31,765.0 (2,786.5)

Increase/(Decrease) in cash

9,425.7 (2,399.9)

3,856.3

4,286.5 (2,297.6)

Feb 09

220.0

18,154.4

FY09E

163.1

200.0

13,701.6 18,460.7

4,520.5

FY08

2,397.4

114.9 9,813.0

14,298.1

Projects under development PBT

93.2 8,061.6

4,223.8

Other Current Assets FY07

69.8 6,013.3 16,698.0

Loans & Advances

FY06

6,531.7 7,469.7

Less: Accumulated

Cash & Bank

Cash Flow Statement (Rs mn)

5,711.5

134,747.3 179,773.0 193,187.0

Miscellaneous Expenditures TOTAL ASSETS Valuation Ratio

330.0

1.0

350.0

1.0

134,747.3 179,773.0 193,187.0

FY07

FY08

FY09E

FY10E

11.1

17.4

12.7

13.5

9.8

P/CEPS

9.0

6.8

4.7

4.8

4

P/BV

0.5

1.4

1.2

1

0.9

EV/EBIDTA

3.0

6

5.1

3.5

1.7

EV/Sales

0.7

0.8

0.8

0.5

0.3

2.70

3.60

0.98

0.96

1.22

P/E

DPS Average shares (mn)

215

219

1172

1401

1401

Market cap (Rs mn)

14,194

14,470

77,320

92,495

92,495

Enterprise value (Rs mn)

24,123

37,315 109,974

146,758

154,056

Ratio Anlaysis

FY06

FY08

FY09E

FY10E

3.8 5.2 3.7 5.0 5.3 6.9 131.0 39.2 4.61% 14.58% -36.41% 37.50% 27.1% 27.5% 11.9% 15.3% 17.6% 16.3% 12.7% 10.6% 1.9 1.8

4.9 4.5 6.9 49.0 38.48% -6.13% 25.3% 12.4% 11.9% 8.8% 1.5

Basic EPS (Rs) Adjusted EPS (Rs) CEPS (RS) BV (RS) Sales growth % EPS growth % EBIDTA margin % PAT margin % ROE ROCE Debt:Equity (x)

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6.0 5.9 7.4 124.7

23.9% 19.3% 20.8% 13.2% 1.6

FY07

6.7 6.3 9.1 54.4 34.97% 37.60% 26.0% 12.6% 13.0% 10.6% 1.4

SYSTEMATIX SHARES & STOCKS (I) LTD. 25

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Stock Ratings BUY (B) ACCUMULATE (A) REDUCE (R) SELL (S) NOT RATED (NR) the stock under review.

The stock's total return is expected to exceed 20% over the next 12 months. The stock's total return is expected to be within 10-20% over the next 12 months. The stock's total return is expected to be within0-10% over the next 12 months. The stock's is expected to give negative returns over the next 12 months. The analyst has no recommendation on

ATTRACTIVE (AT) NEUTRAL (NL)

Fundamentals /Valuations of the sector is expected to be attractive over the next 12-18 months. Fundamentals /Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months.

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