Stock report : Jaiprakash Associates - a big conglomerate in making

This stock report on Jaiprakash Associates was requested by long time reader and follower of Indian Stocks News, Mr. Janak Soni. He has sent me a small list of large cap stocks he wants to invest in for 2 - 3 years time frame. I am going to write on each of them one by one.

The first stock report from his list was on Punj Lloyd.

The Jaypee Group is a 27,700 crore market cap diversified infrastructural industrial conglomerate. It operates through its various subsidiaries in different business segments.

Jaiprakash Power Ventures Limited (JPVL)
The company with its operational power plants - 300 MW Baspa-II (Himachal Pradesh) and 400 MW Vishnuprayag (Uttarakhand) is India’s largest Private sector Hydropower producer and is on its way to be an integrated power producer with expansion in Thermal & Power Transmission.

Jaypee Karcham Hydro Corporation Limited (JKHCL)
The Government of Himachal Pradesh again invited the group for the Karcham Wangtoo a 1000 MW project. The group formulated JKHCL for this project. Still under execution, the project is to commence its operations in the year 2011. View details

Jaypee Arunachal Power Limited
The company is setting up two hydropower projects - Lower Siang Project (2700 MW) and the Hirong Project (500 MW) in Joint Venture with the Government of Arunachal Pradesh.

Bina Power Supply Co. Limited
BPSCL shall set up a 1250 MW (two phase of 625 MW each) coal fired Thermal Power Plant at Bina in the State of Madhya Pradesh.

Jaypee Power Grid Ltd.(JPL)
JPL has been formed for execution of the transmission system between Wangtoo in Kinnaur district of Himachal Pradesh & Abdullapur in Yamuna Nagar district of Haryana for evacuation of 1000 MW power from Karcham Wangtoo HEP in Himachal Pradesh.

Bhilai Jaypee Cement Limited (BJCL)
Incorporated in the state of Chhattisgarh as a Joint Venture with Steel Authority of India Ltd. (SAIL). The said company is to produce a 2.2 MTPA split-located Cement Plant at Bhilai in the State of Chattisgarh and at Babupur, Satna in the State of Madhya Pradesh.

Gujarat Jaypee Cement & Infrastructure Limited (GJCIL)
The Group has signed an Agreement with Gujarat Mineral Development Corporation Limited (GMDCL) for setting up of a 2.4 MTPA capacity cement manufacturing plant with captive power station and captive Jetty in district Kutch of Gujarat.

Bokaro Jaypee Cement Limited (BOJCL)
BOJCL, the second joint venture between the Company and SAIL with management control vested in the Company, is incorporated to set up a 2.1 MTPA capacity cement plant at Bokaro in Jharkhand.

Madhya Pradesh Jaypee Minerals Limited (MPJML)
A Joint Venture company between JAL and the Madhya Pradesh State Mining Corporation Limited (MPSMCL) to develop the Amelia (North) Coal block.

Jaypee Infratech Limited (JIL)
A subsidiary of Jaiprakash Associates Ltd. which would undertake the implementation of prestigious Yamuna Expressway Project comprising of 165 KM, 6 Lane Access Controlled Expressway connecting Greater Noida with Agra.

Jaypee Ganga Infrastructure Corporation Limited (JGICL)
JGICL a wholly owned subsidiary of the Company for implementation of the prestigious 1047 km, long 8-lane Access-Controlled Expressway connecting Greater Noida with Ghazipur- Ballia.

Himalayan Expressway Ltd.
The Company will undertake the construction of Zirakpur-Parwanoo Highway connecting Punjab, Haryana & Himachal Pradesh on BOT basis. The total length of the highway would be 28.690 kms.

JPSK Sports Pvt. Ltd.
JPSK Sports Pvt. Ltd. is incorporated for developing a Greenfield state-of-the-art Sports Complex including Car Race track for motor sports with related integrated support infrastructure including townships, cricket stadium, go karting track and auxiliary facilities.

Why should one buy stocks of Jaiprakash associates, if at all?
Let's have a look at where the group businesses are contributing in growth:

Cement business This is the cash cow for group. Jaiprakash Associates’ (JPA’s) current capacity stands at 22.8m tonnes has an attractive realization and EBITDA/tonne on account of savings in terms of tax, captive power and market positioning. The company is expected to add another 9-10m tonnes in the next two years, making it a ‘33.5m tonne giant’ (This is only next to giants Holcim and UltraTech Group).

Power business: The next cash cow. JPA’s 76.3% subsidiary, Jaiprakash Power Ventures, (JPVL) (current operational hydro power capacity of 700MW), has capacity addition plans of 8x under construction. JPVL is expected to reach an installed capacity of 5590MW in FY15E, with a 70:30 hydro-thermal mix.

Jaypee Infratech (JPI)
is creating long term value. The biggest expressway, Yamuna Expressway (YEW), is expected to create a virgin 530 million sq.ft civilization development around it which is likely to establish JPI as one of the biggest real estate players in India. The company has sold close to 23.5m sq.ft out of this 530m sq. feet till now at an average rate of Rs2,900/sq.ft.

Concerns over investing

Before rushing to make a decision to buy stocks of company, let's have a look at few concerns.

All the above mentioned growth targets are tremendous and if achieved, would certainly create huge value for company and shareholders. But, yes there is a but, to achieve this huge growth, company needs huge cash. Huge amount of money is needed to realize all these plans. Total requirement of funds by JPA stands at
Rs 99bn for power, cement and YEW. The company is dependent on external funds for hydro power projects (till the present plants under construction get operational) and higher internal accruals for cement business. Inability in raising this money would dampen the future projects and pose a setback to all 0aggressive growth targets.

Any delay in power plant commissioning would increase the initial cost and prolong the benefits and cash flow. Interest cost would be rising and eat away profits.

Then there is a real estate play in picture. NCR region, where company has most of it's real estate, have seen oversupply of housing by various real estate companies. Most of the land company has for development is around the expressway which is slightly remote to the main city of Delhi and Noida. I was in Greater Noida for some time recently and I have seen most of the area around myself. Greater noida has still a long way to go to be called as big city. Reports of airport in Jewar (still in dreams and air!) to be moved to Meerut might dampen the real estate prices further. Any fall in real estate prices would lead to lower realizations of all land.

Stock price target
Looking at all the numbers, (recent results are here) , and at historic values, if we expect a growth of on an average 25% in revenue and profit numbers, one can expect the upside of 15% in stock price in an years time. So at current stock price of Rs 130, the target price comes to be around Rs 150. The stock could do even better year on year in long term over the period of 4 - 5 years considering all the projects lined up.