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Research
Buy Jaiprakash Associates - Sharekhan
Posted On : 2011-11-20 01:48:08( TIMEZONE : IST )
- Jaiprakash Associates
- Cluster: Ugly Duckling
- Recommendation: Buy
- Price target: Rs105
- Current market price: Rs67
Earnings ahead of estimate: Jaiprakash Associates Ltd (JAL) on a stand-alone basis posted a net profit of Rs128.7 crore (an increase of 11.4% year on year [YoY]), which was well ahead of our as well as the Street's expectations on account of much higher than expected profitability in its construction division and a higher than expected other income. However, the cement division disappointed with a loss at the EBIT level; its real estate division's performance was also below expectation due to the slowdown in the property market.
Overall revenue supported by cement division: JAL's revenues improved by 2.5% YoY to Rs3,067 crore in Q2FY2012. The overall revenue of the company was supported by its cement division, which posted a revenue growth of 9.6% YoY (driven by a volume growth of 18.8% as the realisation declined by 7.8% in the same period). Its construction division's revenue even though declined by 1% YoY the same at Rs1,555 crore was higher than our estimate. However, on account of the slowdown in the property market its real estate division posted a 37.6% decline in its revenue.
OPM contracts due to loss in the cement division: The operating profit margin (OPM) contracted by 81 basis points YoY to 22.3% in Q2FY2012 on account of the cement division, which posted a loss to the tune of Rs29 crore on account of cost push and higher than expected pressure on cement realisation. However, the negative impact of the disappointing performance of the cement division was largely offset by a surge in the EBIT (in percentage terms) of the construction division by over 15 percentage points YoY to 36.1%. Consequently, the operating profit declined by 1.1% to R683 crore.
SOTP valuation: We have re-visited our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected cost pressure in the cement division and the better than expected profitability of its construction division. Consequently, the revised EPS estimates for FY2012 and FY2013 work out to Rs3.1 and Rs4.2.
We continue to like JAL due to its diversified business model and aggressive expansion plan. However, the huge cost pressure in the cement division and the fluctuating profitability of the construction division will be the key risks. In terms of valuation we continue to value the stock using the SOTP valuation methodology. We have valued the cement business at 6x FY2012 EV/EBITDA. We have valued the construction division at 6x EV/EBITDA. We continue to value the real estate business at 1x its net asset value. For power projects, we have considered those projects in our valuations that are either operational or financially closed. In terms of the hotel business, we have valued the same at 7x FY2012 EV/EBITDA. The fair value based on the SOTP method works out to Rs105 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs105. At the current market price, the stock is trading at a PE of 21.7x FY2012 and 15.8x FY2013 earnings estimates.
