Jaypee Infra goes public; profit a long way off

Jaypee Infra goes public; profit a long way off

Jaypee Infratech Ltd is coming out with a public issue of 2.01-2.22 million shares, including a fresh issue of shares worth Rs1,650 crore and an offer for sale of 0.6 million shares from the holding company, Jaiprakash Associates Ltd. The promoter group’s holding in the company before the issue is 99.1%, which will dilute to 83.2% after the issue.

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Jaypee Infratech, which is part of the Jaypee Group, was incorporated in 2007 and is engaged in the development of the Yamuna Expressway and related real estate projects. The company holds the concession from the Yamuna Expressway Industrial Development Authority to develop, operate and maintain the Yamuna Expressway in Uttar Pradesh, connecting Noida and Agra (165km). The concession also provides for the right to develop 25 million sq. metre of land along the Yamuna Expressway at five locations for residential, commercial, amusement, industrial and institutional purposes. The business model seeks to earn revenues from traffic and related facilities on the expressway during the 36-year concession period and develop associated real estate pursuant to the concession.

Jaypee Infratech has the right to earn toll revenue from the Yamuna Expressway for a period of 36 years, following the award of a certificate of completion of the project. At the end of the concession period, the expressway will be transferred to the expressway authority without any payment to the company under the terms of the concession agreement. The Yamuna Expressway is expected to be completed by 2011 (ahead of schedule of April 2013).

The Jaypee Group’s expertise and resources will help develop the Yamuna Expressway project, and commission and operate the planned Yamuna Expressway in a timely and cost-effective manner. Jaiprakash Associates has a strong project implementation track record for a variety of infrastructure projects. Further, we believe Jaypee Group’s cement production operations and captive aggregate mines offer a steady and reliable source of concrete and aggregate, respectively, for the construction of the planned Yamuna Expressway.

The company has a unique business model in which project revenues are expected to be derived from a combination of expressway tolls and land development. The expressway is likely to benefit from land development as those who shall work or live near the expressway are expected to generate toll revenue.

At the same time, real estate developments are likely to benefit from the expressway. Rather than being limited to a single infrastructure investment or real estate project, the concession model addresses residential, commercial, industrial and institutional development in a holistic manner.

The Yamuna Expressway is strategically located in the north-west region of Uttar Pradesh. The development of real estate along the Yamuna Expressway is expected to strengthen connectivity, considerably reduce travel time and give impetus to industrial and commercial growth between Noida and Agra. We believe the real estate project is likely to benefit from the expressway and other planned infrastructure initiatives in the vicinity of the expressway.

The company’s sole business is the development of the Yamuna Expressway, which has a concession period of 36 years. After the completion of the concession period, the project will be transferred to the government of Uttar Pradesh and the company will not earn any toll revenues from the expressway. Further, following the sale of any real estate projects within the five plots, the company will not earn revenues thereon.

Jaypee Infratech is likely to benefit from its parent company in terms of resources and execution skills. The ongoing project is running ahead of schedule and provides comfort with regard to its execution. The Jaypee group’s strong brand name, strong execution capabilities and quality land bank would ensure sustainable growth for Jaypee Infratech. However, in terms of financials, the company is having negative cash flow from its operations due to the longer gestation nature of the business.

In terms of valuation, the net asset value per share works out to Rs115, which is close to the higher end of the issue price band of Rs102-117. However, there is potential for upside in the stock’s valuations if the company is able to monetize its land bank at a much faster rate and higher than expected realizations.

Graphic by Yogesh Kumar/Mint