Stock Review: Jaiprakash Associates

Jaiprakash Associates is expected to be a major beneficiary of the robust demand for cement in the central and northern markets due to a pick-up in infrastructure activity and a 33 per cent rise in capacity during FY10-FY12. Cement contributed 45 per cent to the company's revenues in the June quarter.

Jaiprakash Associates will derive 63 per cent of its total planned capacity of 33.6 million tonnes by FY12 from the central and southern markets, where prices have risen by `20 for a 50-kg bag, after a correction of `5060 a few months ago. The real estate business segment, which accounts for 11 per cent revenues, is also growing at a healthy rate. Revenues from the segment stood at `360 crore in the first quarter of the current financial year compared to

`650 crore in FY10. However, investors need to consider the execution risk in power (6,200 Mw under construction, including 4,500 Mw to be ready by FY13) and hurdles in construction of the 165-km eight-lane Yamuna Expressway. Any delay in projects will directly affect execution of its lowmargin in-house construction division, which accounts for another 45 per cent revenues and around 90 per cent of the total order book as of FY10.

Constant capital infusion required for capital-intensive businesses, leading either to equity dilution (189 million outstanding treasury shares or eight per cent of total diluted equity capital), or higher interest burden (10 per cent of sales in the June quarter) due to higher consolidated FY10 net debt-to-equity ratio of about three times, will put pressure on the stock's upside.

The stock has gained nine per cent over the last one month, as compared to a 12 per cent rise in the Sensex. It ended flat at `121.95 on Monday after rising 2.6 per cent intra-day. Analysts expect 20 per cent upside from the current levels on account of better visibility in cement and real estate businesses.

Strong visibility for cement and real estate businesses will fill in for a relatively stable performance by the construction division