We remain neutral on Jaiprakash Associates and lower our target price to Rs 44 from Rs 52. Jaiprakash Power Ventures (JPVL) ? a 60% subsidiary of Jaiprakash Associates ? concluded the much-anticipated sale of its operational hydro plants for Rs 10,000 crore.
Although the sale consideration was fair, in our view, it leaves JPVL with underutilised coal-based power plants that need to service a sizeable debt, leaving no room for error on project stabilisation.
For JP Associates, it further highlights its commitment to debt reduction even if at the cost of divesting cash cows. JP Associates? ability to convert its white elephants into cash cows remains the key for survival; a leveraged balance sheet will have corresponding windfall for equity holders. We have revised our target price for JP Associates to Rs 44 to factor in delayed execution and higher risk for coal-based power projects as well as higher standalone debt in the parent entity.
As of March 2013, JPVL had a gross debt of Rs 23,000 crore, which R5,600 crore was attributable to the projects that have been put up for sale. Upon conclusion of the current transaction, JPVL will have a debt of Rs 16,600 crore, which will have to be serviced from ramp-up of the coalbased projects. We note that earnings predictability of assets sold was high, while risk to earnings for coal-based projects remains contingent on ramp-up of coal supplies.
Kotak Institutional Equities
