Stock Review: JP Associates

JAIPRAKASH Associates is a classic example of an evolving infrastructure play with equal amount of risk. The company has gathered substantial momentum over five years. However, most analysis of the stock speak of the company's long term potential. For instance, Citi says over the next 10 years, JPA could be one of Indias top three cement companies, with a capacity of 37.6 mtpa and it could have a power portfolio of 13,960 Mw of hydel and coal power plants. The company also has one of the largest real estate development businesses (696 million sq ft). Over the years, JPA has won key projects like the Taj Expressway project. Analysts are excited about the triple play of real estate, construction and the build, operate and transfer (BOT) potential of the project.

However, investors seeking to participate in this infrastructure play should remember some of the key downside risks like delays in the Yamuna Expressway project and in developing and selling land associated with the project. While the long term potential may be good, the company is facing pressure on margins, thanks to higher interest payouts. The near-term risks are visibly impacting the numbers. The profit-after-tax remained flat at `107 crore at the end of the first quarter, while net sales dropped one per cent to 3,140 crore. Revenues for the quarter remained flat, as six per cent year-on-year revenue growth in cement was negated by 11 per cent decline in construction revenues and five per cent decline in real estate revenues, says Emkay Global.

Though the company's cement expansion plan, which would take capacity from 9 mtpa in FY08 to 30 mtpa by FY12, is nearing completion, the impact of the debt-funded capital expenditure and soaring interest cost is hurting its numbers. Interest cost for the quarter increased 30 per cent YoY, while depreciation charge jumped 15 per cent YoY.

Hence, the 15 per cent Ebitda growth could not flow down to the bottom line, as the net profit growth was restricted to a meagre two per cent, with net profit of `107 crore (though in line with estimates). With the cement sector being hit by over-capacity and sluggish demand and slowing orders in the engineering and construction segment, analysts remain cautious on the stock and have cut the target price.