The stock of Jaiprakash Associates Ltd has gone up 23% in the last one month. At around Rs840, the stock trades at a price-to-earnings ratio of 28 to 38 times FY08 earnings, depending upon various analysts’ estimates. The stock is by no means cheap and although earnings per share have increased by 50% in the June quarter compared with the year ago period, the rise in operating profits has been far more prosaic, at 13%. Higher “other income” helped boost the bottom line. Net sales are up just 3.6%.
The cement division, which accounts for half the revenues, has been the star. Both margins and revenues increased for the company’s cement operations, with the result that profits from the division rose 66% year-on-year. In contrast, the construction division has seen lower revenues and profits. This was the trend in the March quarter as well.
But the stock’s allure is not so much in what the company has done but in what the future holds. The company’s capacity expansion programme will enable it to quadruple its cement capacity within four years. Even if the direst warnings of cement prices crashing as a result of overcapacity come true, the company’s cement volumes will ensure higher profits.
The lull in the construction business is also temporary, with new projects starting to contribute from the second half of the year. The company is a big player in the hydropower segment, but the real value accretion is expected to come from the Taj Expressway project, awarded to the firm in 2003. The project involves not only the construction of a six-lane highway between Noida and Agra, but also the development of 6,250 acres of the adjoining land. It is the prospects for the real estate business, rather than the other divisions, that have driven up the Jaiprakash scrip recently. Jaiprakash Associates is a company that is in the process of transforming itself from a cement player to becoming a complete player on the country’s infrastructure sector, with businesses spanning cement, construction, power, real estate and now steel. It is this transformation that is driving the stock’s re-rating.
The market was unhappy with Deepak Fertilisers And Petrochemicals Corp. Ltd’s results for the June quarter. Although net sales increased by a healthy 32%, operating profit rose just 4.26% as margins fell by over 450 basis points. The stock reacted by falling 4.25% in intra-day trade on Monday.
A 41-day shutdown of the company’s ammonia plant impacted Deepak’s overall production and also led to an increase in input costs, as ammonia had to be outsourced. Raw material cost (inclusive of purchase of traded goods) rose by over 700 basis points. If it wasn’t for a cut in overheads, the drop in margin would have been much worse.
But the ammonia plant shutdown alone wasn’t to be blamed for the drop in margin. Sales of isopropyl alcohol (IPA) and propane, a new addition to the company’s portfolio, accounted for 42% of the company’s chemicals business. This business, which enjoys lower margins than Deepak’s other chemicals businesses, didn’t exist last year and hence the drop in overall margins. Finally, prices of methanol dropped by 15-20% year-on-year, points out Rohan Gupta of Emkay Shares.
The three factors together led to a 13 percentage point drop in the margins of the chemicals business. But absolute profit levels have been maintained at about Rs38 crore because of a jump in revenues and thanks to lower losses in the fertilizers business. Chemicals revenues grew as much as 38.3% last quarter owing to the addition of the IPA plant.
Although lower methanol prices continue to be a concern, Deepak seems to be on better footing now, thanks to the completion of the Dahej-Uran Pipeline. Once the last-mile connectivity is achieved, gas supply to its plants would increase, allowing the company to gain from not only higher capacity utilization but also lower energy costs. But the markets still seem to be treading cautiously, what with the stock trading at only about 10 times trailing earnings.
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