VR Logo

Stock Insight: Powered to Grow

Jaiprakash Associates is all set to exploit the huge potential in hydro power and infrastructure sectors

Jaiprakash Associates (JAL), the flagship of the Jaypee Group, was promoted in 1996. The company has interests in engineering and construction (E&C), cement, hydropower, highways and hospitality sectors.

The company has created a niche for itself and grown up to be a significant player in executing river valley and hydropower projects on a turnkey basis. Currently, the group is large hydropower projects.

Given that India is endowed with a huge economically exploitable hydro potential, construction activities in this space are set to accelerate. As only about 21 per cent, or just over 32,326 mw, has been exploited so far, the government has accorded highest priority to the rapid development of hydropower and has launched a 50,000-mw hydropower initiative.

JAL is well-positioned to capture the emerging opportunities. It has developed in-house expertise for undertaking such projects on engineering, procurement and construction (EPC) basis. The company has a strong order of Rs 7,500 crore spread over the next five years (FY07-12).

The company is, at present, executing 5,940 mw of projects which are scheduled for commissioning over the next three years and there seems no major execution risk for these ongoing projects given its past track record. JAL seems to be on growth track and set to expand its share to 55 per cent of all hydelpower projects to be announced by 2011-12. The company is also exploring opportunities in the Middle East and South Africa, which would further jack up its order book.

In the cement space, JAL has chalked out an expansion strategy and is poised to become the third-largest manufacturer, after Grasim and ACC, with a capacity of 22 million tonnes per annum by 2010. For this purpose the company has embarked on a Rs 3,862-crore expansion drive. The cement division contributed 43 per cent of FY06 revenues. With prices expected to remain firm on the back of demand-supply mismatch, the cement business will provide higher profitability to the company.

The upcoming plant in Himachal Pradesh and clinker-grinding unit at Panipat (Haryana) are expected to provide a larger foothold in the fast growing markets of north India. JAL has also received a letter of intent from the Steel Authority of India Ltd (SAIL) to form a joint venture to manufacture cement at Bhilai and Satna using slag from the steel plant. The company currently operates three plants with an aggregate installed capacity of 5.4 million tpa. The cement division is likely to post an aggressive growth at a CAGR of 46.57 per cent over FY06-09E to Rs 3,982 crore from Rs 1,250 crore on the back of doubling of cement capacity. The EBIDTA is likely to zoom to Rs 1,035 crore in FY09E as against Rs 543 crore in FY07E on the back of volume growth and savings.

Cement consumption has shown an overall jump in recent years. The growth will be driven by investment in infrastructure projects and increase in housing demand. The government’s focus on infrastructure development will be a major growth driver for cement.

The company’s real estate business too has hit the fast track on the back of opportunities available for development of surplus land along the Taj Expressway project. JAL has signed an agreement to construct the Taj Expressway which involves the construction of 160-km, six-lane, access-controlled expressway between Noida and Agra. The expressway is scheduled to be completed in seven years. The per share value of land is estimated at Rs 204 in the hands of the shareholders even after discounting the land by 15 per cent to its acquisition cost.

For the Rs 6,000-crore project, land will be provided by the Uttar Pradesh government at five or more locations. JAL will have the rights to operate the expressway for 36 years.

Hotels and other businesses of JAL are expected to contribute 3 per cent to the top line of the company in FY09E.

The company owns a holiday resort — the Jaypee Residency Manor at Mussoorie, which is managed by Jaypee Hotels, a subsidiary company. Consequent up on the merger of Jaypee Greens with itself, the company now also owns a golf resort at Greater Noida in Uttar Pradesh. Along with the merger, the company also acquired real estate spread over 450 acres in Greater Noida.

Revenues from the engineering and construction business of JAL are likely to grow at a CAGR of 8.38 per cent over FY06-09E to Rs 2,616.50 crore from Rs 2,000 crore. Sales from the cement division are expected to grow at a CAGR of 46.57 per cent over FY06-09E to Rs 3,982 crore from Rs 1,250 crore. Operating margin is all set to improve to 33.88 per cent in FY09E from 32.74 per cent in FY06. High price realisations and cost savings due to the captive power plant would help the company improve operating profit margins despite an increase in excise duty on cement.

Net profit may grow at a CAGR of 25 per cent to Rs 1,263 crore in FY09E from Rs 639 crore in FY06, driven by growth in cement and strong order book. Return on capital employed is expected around 23.93 per cent in FY 09.

Concerns
Any slowdown in GDP growth will impact cement demand adversely. The company is also exposed to the execution risk in projects it has undertaken, which could lead to cost escalations thus reducing return on equity. Any increase in transportation costs will push up the input cost for the industry and affect the profitability.

Source: Idirect