Even as the revenue of Jaiprakash Associates Ltd, the flagship firm of the Jaypee Group, positively surprised the Street in the quarter ended March, operating performance was disappointing; profit margins of both the cement and construction businesses fell sharply compared with the previous year.

The company’s stand-alone total operating revenue increased by 19% year-on-year to about Rs4,000 crore. The growth was mainly driven by a huge 380% increase in revenue from the real estate business to about Rs600 crore, thanks to higher revenue booking from projects started in the last two years.

Secondly, the cement business also posted good revenue growth of 27%. The real estate and cement businesses accounted for 14% and 38% of the total revenue, respectively.

However, another key business—construction—disappointed both on the revenue and profitability fronts. Construction revenue fell 11% and accounted for 43% of the total revenue. The construction business was affected as the Karcham Wangtoo project nears completion and the Yamuna Expressway project faces obstruction at work.

Revenue growth did not result in the same kind of growth at the operating level on account of higher other expenditure (up 45%). Operating profit margin fell sharply by about 420 basis points to 21.4% and, accordingly, operating profit remained flat at Rs851 crore. One basis point is one-hundredth of a percentage point. Note that operating margin in the fourth quarter was lower than the full year margin of 23.7%.

The Ebit (earnings before interest and tax) margin of the cement business fell sharply to 14.2% from 24.2% last year on account of higher costs (power and fuel). The Ebit margin of the construction business also fell sharply to 12.2% from 20%.

However, higher other income and lower tax outgo improved the performance at the net level; net profit increased by 24% to Rs302 crore.

Jaiprakash Associates’ stock has underperformed the Sensex since the beginning of this calendar year. After the results announcement, some analysts revised earnings estimates downwards to factor in higher interest costs and a weak operating environment for the cement business. It’s not unknown that the cement industry is beset by concerns regarding over-supply and higher input costs. Given this, near-term upsides appear limited for the stock.

Graphic by Yogesh Kumar/Mint

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