There appear multiple positives on the horizon for Jaiprakash Associate (JPA). JPA?s ambitious six-lane 165-km Yamuna expressway project is likely to become operational this month, while its 5MTPA cement plant in south India will start firing from Q1FY13. The company recently commissioned its 1,000MW hydro project and will commission its 500MW thermal project during Q2 FY13 and its 1,320MW thermal project by end Q2 FY14.
We estimate that these new projects will drive a consolidated EPS CAGR of 27% over FY12-14. We are 20-45% above consensus on FY12e-14e earnings.
Deleveraging should lower earnings and valuation volatility ? a big price catalyst. We highlight JPA?s strong core operating performance (FY12e-14e Ebitda CAGR of 29%) and tapering capex which, in our view, will compliment its deleveraging drive over the next 12-18 months. The stock has also performed well over the past three months, as improved market sentiment has lowered concerns about fund-raising at low prices, and we see further room for appreciation.
We anticipate that the standalone net debt/equity will fall to 1.6x by FY14e (2.3x in FY12e) and consolidated net debt/equity to 2.5x in FY14e (3.3x in FY12e), lowering earnings and valuation volatility.
JPA?s FY12 earnings are likely to get impacted by increased interest costs on peaking leverage and weak pricing in the cement division during H1FY12. While we anticipate earnings to fall by 12% to R12.3 billion in FY12, we see a sharp earnings rebound in FY13 and FY14 (27% CAGR), led by a strong 22% CAGR in sales and 29% CAGR in Ebitda in the same period.
We initiate coverage of the stock with OW(V) rating and a target price of R97. Our target price values JPA at an implied multiple of 12.3x FY13e consolidated EPS, while it is trading at 13.3x currently and its three-year average has been 18.6x.
JPA?s real estate and construction business contributes c46% of the value, while its cement business contributes c35% and the power business c20%. Any signs of re-investment in new capacity are key downside risks. HSBC
