Stock Review: JP Associates

Jaiprakash Associates reported a satisfactory performance in the September quarter. Its sales jumped more than expected at 63 per cent year-on-year (y-o-y) at 3,071 crore, helped by an increase in construction (73 per cent) and cement revenues (43 per cent) at `1,571 crore and 1,208 crore, respectively. The cement business remained buoyant with a 59 per cent y-o-y jump in volumes (3.4 million tonnes) thanks to capacity expansions and strong despatch growth. The construction business also showed better execution, despite a good monsoon, due to progress on power projects, including Karcham Wangtoo, Yamuna Expressway and real estate.

Operating profit growth came significantly lower at 46 per cent to `759 crore on higher raw material (coal, fly ash) and construction costs.

Also, a 10 per cent y-o-y decline in cement realisation led to a 1,000 basis points (bps) drop in profit before interest and the tax (PBIT) margin of cement business (38 per cent of revenues).

The adjusted net profit marginally declined 0.5 per cent to `115.5 crore due to asubstantial increase in interest and depreciation, mainly led by cement expansion followed by high taxation. The company plans to expand its cement capacity from 22.5 million tonnes to 35 million tonnes by FY12. However, analysts say the realisation would continue to be under pressure even as the volume growth is expected to be strong.

Construction revenues could see some slowdown after the Karcham Wangtoo and Yamuna Expressway projects get commissioned by the end of FY12. Fresh orders will act as a significant trigger for business growth, analysts say. Real estate, which has a relatively lower base (10 per cent of revenues) is doing well. In the first half of FY11, while sales quadrupled to `689 crore, the PBIT margin improved 173 bps to 42 per cent.

The stock ended 3.26 per cent higher at `128.25 over its previous close and trades at 21 times the FY12 estimated earnings. Analysts have an accumulate rating on the stock.

The company needs fresh triggers in its construction business to drive the stock price