Jaiprakash Associates Ltd. (JAL) reported a 46.3% y-o-y increase in net sales, driven by the growth in construction revenue and the commencement of revenue inflow from the real estate segment. Also, the net profit margin improved by 142 bps y-o-y to reach 16.2%.
The company is aggressively expanding its hydro power and cement capacities. The cement capacity is expected to reach 25 mtpa by 2010 from the current level of 8.5 mtpa.
However, owing to rising cost of raw materials and expected moderation in realization rates in the cement business, we expect the operating margins of cement segment to face a downward pressure.
Escalating interest rates and higher cost construction could result in a slowdown in real estate market which in turn could impact the margins of this segment as well.
However, we believe the strategy of integration along the value chain will result in operating efficiencies and thus limit the fall in the margins. We expect the consolidated EBITDA margin to dip by 294 bps to 37.5% in FY09E.
At the current market price, the stock is trading at a P/E of 23.4x for FY09E and 18.1x for FY10E. Our SOTP-based target price of Rs294 implies an upside of 72% from the current market price. We reiterate our BUY rating.