The board of directors of JP Associates Ltd (JAL) has approved the merger of four of its arms operating in hospitality, cement and other related business into JAL. The merger will be effective from 01 April, 2008.
The share swap ratio for the merger will be:
One share of JAL (face value Rs2) for every ten shares of Jaypee Cement Ltd (FV Rs10). JCL is exploring opportunities to set/acquire cement plants in India.
One share of JAL for every 11 shares of Gujarat Anjan Cement Ltd (GACL; FV Rs10). GACL is setting up a 4 million tonne per annum cement plant in Gujarat by FY2010.
One share of JAL for every one share of Jaypee Hotels Ltd (JHL; FV Rs10). JHL owns Jaypee Palace Hotel (Agra), Jaypee Vasant Continental (New Delhi) and Jaypee Siddharth Hotel (New Delhi).
One share of JAL for every one share of Jaiprakash Enterprise Ltd (FV Rs10). JEL owns 15% stake in Jaypee Power Ventures. Jaypee Power Ventures in turn owns power assets of Vishnuprayag hydroelectric project, Siddhie and Karcham Wangtoo.
As per our calculation, the merger process will result in the issue of 14 crore new shares of JAL, which amounts to an equity dilution of 11.3% to 138.1 crore shares.
However, if the company decides to extinguish the shares under cross holding (around 12.8 crore) then the dilution will be only to an extent of 1% and will have a marginal impact on the earning per share (EPS) estimates for FY2010.
Nonetheless, as per reports and our interaction with the management, the company is likely to transfer the 12.8 crore shares under cross holdings to a trust and possibly use it to generate the required funds for its infrastructure and real estate businesses.
In such a scenario, we expect an adverse impact of 8-8.5% on our EPS estimates for FY2010.
We have not factored in the merger into our estimates and will do so once more clarity emerges. At the current market price the stock is trading at 14x FY2009 earnings estimate and 10x FY2010 earnings estimate.
We are downgrading the stock to HOLD recommendation and would review the price target.