Jaiprakash Associates – Weak Margins disappoint results

Jaiprakash Associates reported strong F1Q11 top-line performance. Total revenues grew 52% YoY to Rs31.7 bn. However, significant margin weakness across divisions (mainly cement and construction) meant that even though the high-profitability real estate segment stepped up in the quarter (revenue share rose from 5% in F1Q10 to 11% in F1Q11), EBITDA for the company as a whole grew only 15% YoY.

Net profit of Rs1,051 mn, post adjustment for exceptional income related to the profit booked on the sale of its 4.94% stake in Jaypee Infratech. The 48% yoy increase in depreciation costs for the quarter, associated with the commissioning of about 4.4 mn MTPA cement capacity in the past 6 months (c.1200cr of capex in the quarter), led to EBIT margins of 20% in the segment in Q1FY11 vs 24% in Q4FY10 and 32% in Q1FY10. Construction segment margins also compressed sharply to 7% in the quarter vs 17% in Q1FY10, on account of higher input costs. Overall EBIT margins for the company declined by 650 bps yoy to 15.5% for the quarter.

EPS Estimates – fy 11 and fy 12
Morgan Stanley – Rs 6.44
BOFA Merrill – Rs 5 and Rs 6.15

SOTP Valuation of JP Associates according to Merrill
Infrastructure – Rs 122
Power Projects – Rs 71
Cement – Rs 58
Hotels + Others – Rs 23
Lees Debt – Rs 71
Total – Rs 203 is the Price Target

Edelweiss estimates JPA’s fair value at INR 153/share while Kotak puts the fair value at Rs 170.