Jaypee unlocking value

The results announced by Jaiprakash Associates (Jaypee), a company with interests in cement, engineering & construction, wind power, hotels and golf course, for the quarter ended September 2007 (Q2) are in line with analyst expectations.

The company posted an increase of 11.95% in revenues to Rs 862 crore and 15.56% in net profit to Rs 104 crore for Q2 year-on-year.

Jaypee’s operating margins, though, registered a decline of 7 basis points to 25.64%. According to analysts, this was because new projects in the construction business were below the threshold limit during the quarter.

Some construction companies tend to follow the percentage completed method of revenue recognition under which profits are not booked until the project reaches a certain threshold.

Till that point, only expenses and revenues are booked, and profit is shown as work in progress.

Jaypee derives 48% of its revenues from its cement business, which grew 6.8% to Rs 456 crore. Analysts say the cement business was impacted by a drop of 3% in volumes on account of heavy monsoons in the northern market, which is vital for the company.

This, however, was offset by a 7% improvement in price realisation.

Revenue growth was also led by the construction business, which contributes 45.86%.

The company started execution of new projects, as a result of which revenues from this business grew 13% to Rs 432 crore. As of September 2007, the construction business had a robust order backlog of Rs 11,500 crore.

The remaining 6% of revenues came from other businesses.

Dividend income worth Rs 23.54 crore from its subsidiary Jaiprakash Hydro-Power led to a 58% improvement in other income. Earnings before interest, tax, depreciation and amortisation moved up 194 basis points to 32.59%.

Interest costs rose 35.5% in Q2, thanks to an increase in debt to fund capital expenditure. Depreciation costs rose 17.9% as it commissioned its wind power plant of 25 MW.

Tax expenses grew at a slower pace, thanks to lower tax rates due to benefits from the wind power plant and the tax-free dividend income. All this contributed to the net profit.

Going forward, analysts see revenues generated by the new businesses adding positively to Jaypee’s financials, which the market has already started factoring in.

The stock has outperformed Sensex over the past year, mainly on the back of value unlocking, which the subsidiaries are likely to bring in. Jaypee’s Taj Expressway project is expected to add immense value, provided there are no delays in execution.

Analysts are positive on the stock, which at Rs 1,311, trades at 52.8 times its estimated earnings for 2007-08. Morgan Stanley has valued the stock at Rs 1,461 on the basis of a sum-of-the-parts valuation.

Contributed by Pallavi Pengonda