Jaiprakash Associates’ performance was ahead of our and street’s expectations on the back of an extremely strong performance of its construction business.
The revenues grew by 62.9% year on year (y-o-y) to Rs2,085 crore during Q4FY2009 with the revenues from the construction business leapfrogging by 145.7% to Rs1,164 crore.
The operating profit margin improved by 267 basis points to 33.8% due to better margin in the construction business.
Improvement of 430 basis points y-o-y and 1,700 basis points quarter on quarter (q-o-q) in the earnings before interest and tax (EBIT) margin of the construction business to 30% is quite intriguing to us.
In the cement division, the EBIT margin expanded by 290 basis points sequentially to 29.8% during the quarter.
The net income rose by 83.1% yoy to Rs385 crore, significantly above our expectation of Rs168.8 crore. The results came above our expectation due to impressive performance of the construction division and a higher other income.
Other income stood at Rs110 crore in Q4FY2009 v/s Rs65 crore in Q4FY2008 due to a dividend income of Rs42.9 crore from Jaiprakash Power Venture.
The management has indicated towards very aggressive growth guidance for the next year. In a media interaction, the management has set a target to double the top line to Rs11,000 crore (cement: Rs5,500 crore; construction: Rs4,800 crore; and real estate: Rs1,000 crore) in FY2010.
At bottom line front, the company is looking at FY2009 level bottom line growth rate. In our view, the company’s target appears optimistic in the current environment.
In the real estate business, the company has monetised very well on the realty assets of the Yamuna Expressway. It managed to sell 2.67 million square feet (mn sq ft) taking the total to 5.23 mn sq ft in FY2009 for ~Rs2,600 crore. The company has received advance of over Rs1,000 crore against the area sold from the clients.
Currently, the company’s cement capacity stands at 13.5 millon tonne per annum (MTPA) and expects the same to reach to 18MTPA in FY2010.
For the proposed merger of its fours arms with itself, the company has received the approval of shareholders and creditors of the subsidiaries.
The company has filed petition-seeking sanction to the scheme by the Allahabad high court. As highlighted in the previous reports, this scheme if approved is likely to dilute the company’s equity by 18.4%.
At the current market price, the stock is trading at 17.5x FY2009 earnings estimate and 19.4x FY2010 earnings estimate.
Though the results are encouraging and the growth guidance is quite aggressive, we believe that high leverage and a possible equity dilution could continue to act as a drag on the valuations.
We maintain out HOLD recommendation on the stock and would review the estimates and price target soon.