SEPTEMBER 10, 2012 Economy News As many as 35 stock brokers have been probed by capital market regulator Sebi for possible lapses in controls related to money laundering and terror financing, and further action may be taken soon in these cases.(bl) Diesel cars are unlikely to attract any additional taxes before the Budget next year. (BL) The Central Electricity Regulatory Commission (CERC) has issued draft regulations intended to prevent abuse of market power and regulate the conduct of companies harming or potentially harming competition in the sector. (BS) The finance ministry is coaxing the insurance regulator to double insurers' equity exposure limit in a company, ostensibly to make disinvestment a success without drawing criticism that state-run entities violate prudential measures to bail out the government.(et) The government has no immediate plan to raise petrol, diesel, kerosene and cooking gas prices and the pricing issue will be decided by the Cabinet. (ET) Coming down heavily on the Karnataka government for allowing export of 50.79 lakh tonnes of illegally mined iron ore through the Belekeri port in Goa, the Supreme Court has asked CBI to investigate the matter saying inquiries by its police did not inspire confidence. (ET) Corporate News Indian Bank in which government holds 80 per cent stake, may come out with a follow-on public offer (FPO) next fiscal if market conditions improve. (BL) Biocon Ltd is eying Gujarat to set up a manufacturing plant near Ahmedabad. (BS) Infosys, India's second largest IT services company, is in talks with Everis, a Spanish consulting company, for a possible acquisition. (BS) Raymond is looking at becoming a one-stop shop for vehicle manufacturers in the specialised category such as powertrains (engine, transmission, drive shaft), while being present in other segments. (BS) Bharti Infratel, the tower arm of India's largest mobile phone operator Bharti Airtel, is likely to file a draft prospectus with the market regulator early this week for raising Rs 50 bn through an initial public offering (IPO). (ET) Drug maker Cipla, which has been operating primarily through sales and distribution partners in major drug markets like the US, is now looking at marketing the products on its own. (BS) Textile firm Shri Lakshmi Cotsyn will invest Rs 13 bn by the end of next year to expand capacity in various segments, including terry towels. (ET) Deccan Chronicle Holdings will ask lenders to relax the terms on which it was lent money, the latest attempt by the company to stave off bankruptcy. A corporate debt restructuring package, if approved, will result in up to Rs 33 bn in loans from 28 banks and financial institutions being recast. (ET) Cipla has scored a "landmark" court win in a patent challenge launched by Switzerland's Roche Holding over the firm's version of a lung-cancer drug. (ET) Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange Equity % Chg Indian Indices SENSEX Index 17,750 0.4 1.1 6.2 NIFTY Index 5,359 0.3 0.7 5.7 BANKEX Index 11,646 0.3 (2.0) 1.2 BSET Index 5,983 0.2 8.0 6.5 BSETCG INDEX 9,541 0.0 (3.7) 0.6 BSEOIL INDEX 8,376 0.4 0.8 7.6 CNXMcap Index 7,239 0.5 (0.0) 2.9 BSESMCAP INDEX 6,496 0.6 (0.8) 2.7 World Indices Dow Jones 13,307 0.1 0.7 6.0 Nasdaq 3,136 0.0 3.8 9.7 FTSE 5,795 0.3 (0.9) 6.6 NIKKEI 8,872 2.2 (0.3) 4.7 HANGSENG 19,802 3.1 (1.3) 7.5 Value traded (Rs cr) 8 Sep 12 % Chg - Day Cash BSE 1,795 16.4 Cash NSE 1,048 (89.4) Derivatives 12,189 (88.6) Net inflows (Rs cr) 7 Sep 12 % Chg MTD YTD FII 137 (192.6) 9,974 63,255 Mutual Fund (203) 97.4 (803) (8,851) FII open interest (Rs cr) 7 Sep 12 % Chg FII Index Futures 10,219 10.3 FII Index Options 41,129 2.0 FII Stock Futures 24,688 1.4 FII Stock Options 1,310 7.4 Advances / Declines (BSE) 7 Sep 12 A B T Total % total Advances 149 1,180 217 1,546 66 Declines 46 562 83 691 30 Unchanged 4 75 20 99 4 Commodity % Chg Crude (NYMEX) (US$/BBL) 96.3 (0.1) 3.7 14.5 Gold (US$/OZ) 1,737.0 2.0 7.2 9.5 Silver (US$/OZ) 33.6 3.1 20.6 19.2 Debt / forex market 10 yr G-Sec yield % 8.3 8.3 8.3 8.4 Re/US$ 55.4 55.6 55.1 54.9 Sensex 18,500 17,800 17,100 16,400 15,700 15,000 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
ANNUAL REPORT UPDATE Teena Virmani teena.virmani@kotak.com +91 22 6621 6302 JAIPRAKASH ASSOCIATES LTD PRICE: RS.68 RECOMMENDATION: BUY TARGET PRICE: RS.87 FY13E P/E: 20.6X Annual report highlights Cement capacity to be expanded to 36MT during FY13 on consolidated basis Construction division performance to be led by fewer projects in FY13 as compared to FY12. Borrowings continue to remain high; company recently raised FCCB worth $150 mn to pay part of outstanding debt Stock provides decent upside from the current levels. We thus upgrade the stock to BUY from ACCUMULATE earlier. Summary table (Rs mn) FY11 FY12 FY13E Sales 129,665 127,429 136,713 Growth (%) 29.0-2.0 7.0 EBITDA 28,887 33,294 33,449 EBITDA margin (%) 22.3 26.1 24.5 PBT 12,402 13,143 10,614 Adjusted net profit 6,521 10,264 7,006 EPS (Rs) 3.1 4.8 3.3 Growth (%) (28.4) 57.4 (31.7) CEPS (Rs) 8.3 7.7 6.6 BV / share (Rs) 44.2 57.9 60.6 Dividend / share (Rs) 0.4 0.5 0.5 ROE (%) 13.0 9.5 5.6 ROCE (%) 9.2 9.6 8.7 Net cash /(debt) (190,426) (200,165) (208,652) NW capital (days) 120.0 142.2 165.0 P/E (x) 22.2 14.1 20.6 EV/EBITDA (x) 11.6 10.4 10.6 EV/Sales (x) 2.6 2.7 2.6 P/BV (x) 1.5 1.2 1.1 Source: Company, Kotak Securities - Private Client Research Cement division capacity to reach 36MT on consolidated basis during FY13 During FY12, Jaiprakash Associates expanded its capacity by 3.1MT comprised of 2.1 MT cement grinding plant set up through SPV in JV in SAIL and another 1 MT cement grinding plant in UP. Expanded capacity of company stood at 33.3MT including capacities set up in JVs. It is also expanding its capacity by 2.75MT with 1 MT in central zone and 1.75MT in UP zone which would get operational during FY13. Thus expanded capacity of the company would stand at 36 MT. During the year, cement production at company's cement plant in JV with SAIL at Bhilai has been impacted due to lesser supply of slag from Bhilai Steel Plant than committed under long term agreement. Company is in talks with SAIL for augmentation of slag supply. Company also demerged its Cement Plants in Gujarat & Andhra Pradesh and its other units viz. Asbestos Sheet Plants, Heavy Engineering Workshop & Hi Tech Casting Centre / Foundry into its Wholly Owned Subsidiary, namely, Jaypee Cement Corporation Limited (JCCL). JCCL has a capacity of 9.8MT with a net debt of Rs 26 bn and is currently in talks with strategic players for selling a stake. JAL capacity Capacity Under Total Captive (mn ton) implementation power (MW) Central Zone 11.2 1 12.2 124 UP zone 4 1.75 5.75 64 North Zone 6.2 6.2 East zone 2.1 2.1 23.5 26.25 188 Source: Company JCCL capacity Capacity Under Total Captive (mn ton) implementation power (MW) West Zone 4.8 4.8 90 South Zone 5 5 35 Source: Company 9.8 9.8 125 We have incorporated demerged cement assets in our financials and correspondingly we have factored in valuations separately for JP Associates standalone cement capacity and JCCL. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
Construction division performance to remain subdued during the year Company posted revenues of Rs 58.4 bn during FY12, registering a decline of 3.5% YoY. We believe that construction division performance is likely to remain subdued at Rs 55 bn for FY13E since execution of large projects such as Karcham Wangtoo and Yamuna Expressway is largely complete during FY12. Company is implementing two Thermal Power Projects, namely, i) 1320 MW (2 x 660 MW) Jaypee Nigrie Super Thermal Power Project in Nigrie, Distt. Singrauli in Madhya Pradesh. ii) 1250 MW Jaypee Bina Thermal Power Plant in Madhya Pradesh (Phase-I of 500 MW shall be fully commissioned in FY 2012-13.) Construction work on Nigrei thermal power project is progressing as per schedule with supplies for generator and turbine being received from L&T-MHI. Company plans to commission this project by H1FY14. Entire coal requirement of 5MT for this project would be met by Amelia coal blocks and Dongri-Tal II coal blocks. Work on Bina project is being implemented in two phases and this project is expected to commission by Q3FY13. For Bara thermal power project of 1980MW, supplies from BHEL for boiler, turbine and generator are in progress and work is progressing satisfactorily. Thus we believe that construction revenue growth from now on would be led mainly by execution of Bina, Nigrei and Bara thermal power project and execution of hydroelectric project related work in Bhutan. Real estate division JP Associates is carrying out various real estate projects projects through Jaypee Greens and Jaypee Infratech. Its projects Jaypee Greens Wish Town, Klassic and Aman had received excellent response and last year company also launched plotted development Jaypee Greens Yamuna Vihar along with commercial space and high rise apartments. Company expects to witness healthy traction from these projects going forward. FCCB issue of $150 mn Jaiprakash Associates has recently raised money through an FCCB issue of $150 mn to repay part of the proceeds of outstanding FCCB which company had raised during FY08. Current FCCB has a coupon rate of 5.75% and a conversion price of Rs 77.5 per share. On conversion, this would result in an equity dilution of nearly 5%. FCCBs of $354.4 mn were outstanding on the books of the company as on 31st Mar, 2012 with a conversion price of Rs 165 per share. Thus, unless converted, these bonds are redeemable at maturity at a premium of 47% representing nearly $523 mn. We thus believe that $150 mn raised from FCCB issue will be primarily used to repay part of the outstanding FCCB amount. For remaining amount, company has an option to raise funds either through ECB or sale of treasury shares or stake sale in JCCL. Coal block allocation issue may not impact company negatively Jaiprakash Associates had entered into three separate joint venture with Madhya Pradesh State Mining Corporation Limited (MPSMCL) for development and mining of coal from coal blocks allotted to MPSMCL. The first JV namely Madhya Pradesh Jaypee Minerals Limited (MPJML) is developing a coal block at Amelia (North) at Singrauli District in the State of Madhya Pradesh. This JV is awaiting MoEF and forest clearances and would start mining once these clearances are received. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
The second JV namely MP Jaypee Coal Limited (MPJCL) is in the process of developing a coal block at Dongri Tal-II at Singrauli in Madhya Pradesh. Coal from these two blocks is expected to be used for 1320MW Nigrei thermal power project. This JV is in advanced stage of mine development with various clearances from concerned authorities in place. The third JV - MP Jaypee Coal Fields Limited (MPJCFL) has been incorporated for mining and sale of coal from Mandla (South) coal block in District Chhindwara, Madhya Pradesh. This JV has received part clearances. We believe that the recent CAG report mentions only the coal blocks allotted to private sector which may come under scrutiny. However, in the above mentioned projects, coal blocks were allotted to Madhya Pradesh State Mining Corporation Limited (MPSMCL) and JPA then had entered into JV with MPSMCL. Thus, we don't see a major risk for JP Associates. Valuation and recommendation At current price of Rs 68, stock is trading at 20.6x P/E and 10.6x EV/EBITDA on FY13 estimates respectively. We recommend BUY on Jaiprakash Associates with a price target of Rs.87 We tweak our FY13 estimates to factor in annual report details and also to factor in demerged cement assets. Correspondingly our revenue estimates stand reduced. However with corresponding decline in interest and depreciation charges also, out net profit estimates get marginally enhanced. We thus arrive at a revised price target of Rs 87 on FY13 estimates (Rs 83 earlier). During our last update for Q1FY13, we had downgraded the stock to AC- CUMULATE at Rs 76 owing to limited upside. However, now with significant upside from the current levels, we now upgrade the stock to BUY with a price target of Rs 87. Sum of the parts valuation SOTP FY13 Price Rationale per share Core business Construction 72,709 34 At 6x EV/EBITDA Cement 144,086 68 At $125/tonne for cement, inline with peers Jaypee greens 9,757 5 NPV of land bank Hotels 3,092 2 6x EV/EBITDA at a discount to peers Less net debt(fy13) 208,652 98 Core business valuation 20,992 10 JCCL valuation 42,540 20 At $125/tonne for cement, inline with peers JPVL valuation 47,939 23 At 10% discount to the market price Karwam Wangtoo valuation (44%stake) 12,508 6 Power assets valuation 28 Real estate valuation 47,817 22 At 10% discount to the market price Treasury share 11,585 5 At 10% discount to the market price Total 125,602 87 Source: Kotak Securities - Private Client Research Dipen Shah holding 150 shares of Jaiprakash Associates Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers Reliance Ind 796 0.5 2.3 0.2 Cipla 391 2.6 1.6 0.6 Tata Motors 246 1.0 1.4 0.8 Losers BHEL 203 (1.2) (0.6) 1.1 Bharti Airtel 255 (0.5) (0.5) 0.2 NTPC 172 (0.4) (0.2) 0.03 Source: Bloomberg Fundamental Research Team Dipen Shah IT, Media dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement, Mid Cap teena.virmani@kotak.com +91 22 6621 6302 Saurabh Agrawal Metals, Mining agrawal.saurabh@kotak.com +91 22 6621 6309 Saday Sinha Banking, NBFC, Economy saday.sinha@kotak.com +91 22 6621 6312 Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com +91 22 6621 6143 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6621 6448 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6621 6310 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6621 6313 Amit Agarwal Logistics, Transportation agarwal.amit@kotak.com +91 22 6621 6222 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6652 9172 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311 Technical Research Team Shrikant Chouhan shrikant.chouhan@kotak.com +91 22 6621 6360 Amol Athawale amol.athawale@kotak.com +91 20 6620 3350 Premshankar Ladha premshankar.ladha@kotak.com +91 22 6621 6261 Derivatives Research Team Sahaj Agrawal sahaj.agrawal@kotak.com +91 22 6621 6343 Rahul Sharma sharma.rahul@kotak.com +91 22 6621 6198 Malay Gandhi malay.gandhi@kotak.com +91 22 6621 6350 Prashanth Lalu prashanth.lalu@kotak.com +91 22 6621 6110 Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. 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