In a move to consolidate its power assets under one entity, Jaypee Group has proposed the merger of JP Power Ventures Limited (JPPVL), an 80.5% power subsidiary of JAL with Jaiprakash Hydro Power Ltd (JHPL), again a subsidiary of JAL in which JAL holds a 63.3% stake.
The proposed merger is subject to approval and sanction of the high court and is likely to get into effect from April 01,2009.
The proposed merger stipulates one share of JPPVL for three shares of JHPL. As per our calculation, after the merger JHPL’s equity shares would increase almost fourfold from 49.1 crore to 209.6 crore shares and JAL’s stake in JHPL will go up from 63% to 76.5%.
The current market price of JHPL indicates an upside in JAL’s stake in the power subsidiaries post the merger from our DCF-based power projects value of Rs47 per share.
At the current market price, the new consolidated entity’s market capitalisation stands at Rs19,280 crore (based on a consolidated equity base of 209.6 crore). This values JAL’s 76.5% stake in the new consolidated entity at Rs14,753 crore or Rs104 per share.
However in our valuation we have considered only those power projects of JAL that are either operational or financially closed and have valued these projects using DCF-based valuation.
Hence, we do not see any major implication to our JAL’s sum of the parts (SOTP) valuation from the proposed merger.
We maintain our HOLD recommendation on JAL with SOTP-based price target of Rs237. At the current market price, the stock is trading at 25.4x FY2010 earnings estimate and 22.9x FY2011 earnings estimate.