Jaypee Infratech--A long-term play

By -

Jaypee Infratech, a subsidiary of Jaiprakash Associates, was set up to develop, operate and maintain the 165-km, six-lane Yamuna Expressway connecting Noida and Agra in Uttar Pradesh. The project is estimated to cost Rs 9,740 crore, of which Rs 6,250 has been spent till February 2010.

A part of the funds (Rs 1,500 crore) is proposed to be raised through an initial public offering (IPO) while the remaining will be cash generated from associated real estate development and debt.


The project is expected to be commissioned by July 2011 and earn revenues in the form of toll for 36 years.

Considering the huge cost of construction, mere collection of toll may not help recover the investments. According to estimates of Abhinav Bhandari, analyst, Elara Capital, the project will generate negative net present value (NPV) of about Rs 2,220 crore. The company will need to earn Rs 270 crore per year to recover just the initial investment. However, a lot will depend on flow of traffic and toll charges. According to the company, the average one-way toll will be about Rs 250, or Rs 1.50 per km.

REAL-TY GAINS
Land bank
Location In acres
Noida 1,235
Jaganpur 1,235
Mirzapur 1,235
Tappal 1,235
Agra 1,235
Total 6,175
Develop. Area
(mn sq ft)		 520

Huge land bank
The company has the right to develop 6,175 acres (520 million sq ft) along the expressway at five locations, or 1,235 acres each for residential, commercial, amusement, industrial and institutional purposes

It has already sold 21.3 million sq ft at an average rate of Rs 2,967 per sq ft. At a selling price of Rs 3,000 per sq ft and Rs 1,500 per sq ft construction cost, the operating profit works out to Rs 78,000 crore. However, this amount will accrue only over the next 10-12 years. Also, the cash flow will depend on future real estate prices and cost of construction. Besides, some land parcels in the interiors and less developed towns and cities may not yield the same kind of pricing due to low affordability in these areas.

JP Infra IPO
In Rs crore FY08 FY09 9M FY10 FY10 *
Sales 1 556 533 711
Net profit -11 267 399 532
Net worth 954 1,245 1,904 4,189
BV (Rs) 7.0 10.6 16.3 30.7
P/BV (x) 16.8 11.0 7.2 3.8
EPS (Rs) -0.1 2.0 2.9 3.9
PE (x) NA 59.9 40.1 30.1
* Figures based on annualised 9 months performance of FY10, wherein networth, Book value (BV) & EPS are based on post IPO capital PE and P/BV ratios are based on upper price band of Rs 117 per share

Conclusion
Over a longer period of time, the company’s real estate business will be the key growth driver. On the sum-of-the-parts (SOTP) basis, analysts value Jaypee Infratech at Rs 18,000-19,000 crore.

At the IPO price of Rs 102-117 per share, the market capitalisation of the company works out to Rs 13,933-15,982 crore, 15-30 per cent lower than the SOTP value.

While retail investors are being given a discount of five per cent on the allotment price, existing listed real estate companies are trading at a discount to their respective estimated NPVs.

In this context, analysts suggest Jaypee Infratech’s valuations are marginally on the higher side. Thus, only investors with a long-term view should subscribe to this offer.

Comments

Post a Comment

Popular posts from this blog

Market Euphoria: Too Happy for Too Long

By -
Image
T he  other day, I was talking to a friend who asked me about the direction of markets and what could happen post-Budget. Not that I was interested in predicting specific levels, I said, "if people are too happy for too long, that itself is the biggest risk." As it goes on, keeping people happy for too long, can turn into a national disaster, much like other disasters where ultimately the government is blamed.                                                    The Dangers of Overconfidence Among the investing legends, I have lot of liking for Howard Marks and his insights about human behaviour, market cycles and many other things like second order thinking and going against the crowd.  In his recent memo he writes (Mo st interesting lines in my view), The adage "success is a dangerous neighbour" is particularly relevant in investing. When individuals achieve financial success, they often attribute it to superior skill and knowledge. This overconfi dence can lead to
Read more

Knowledge Compounding: Why it is better to be foolish at the start than at the finish

By -
Image
  W e are probably at the fourth stage of the market where being in the quality stocks is curse, they are no longer producing returns because they are fully discovered. Investors are now bidding for low quality, unloved, undiscovered stocks. This marks the phase of the market where investors begin to compromise on quality and the fundamental principles of investing in favor of chasing the next big stock.     They start disregarding quality in pursuit of higher returns. This herd mentality leads to a strong bullish phase in low-quality stocks. Novice investors, or so-called alpha-riders, become the new authorities in the market.   This reminds me about the wisdom that Vijay Kedia shared with us few years back, “In good times everything looks rosy particularly for the first-time investors who have not seen the market cycles and hence beat the drums. Bull markets produce many self-claimed genius or stock pickers but in reality, the real stock market genius are bornin the bear
Read more

Knowledge Compounding: Wow! I found my next multi-bagger stock.

By -
Image
R eading about a company, I was thrilled to discover its immense potential for growth. The business boasted a strategic position, a vast pool of opportunity, a reputable promoter, significant capital injection, and a doubling of production capacity – all the makings of a winner. Wow! I found my next multi-bagger.                                               But hold on! Examining the share price and valuation quickly deflated my enthusiasm. Isn't this a common occurrence these days? There's an overemphasis on the "top-down" approach, with little regard for the actual price.   This relentless pursuit of the next big idea, sector, or company has eroded the valuable investing principles we learned from Benjamin Graham and Warren Buffett.   It's a growth frenzy, but where's the margin of safety? Everything is validated in the name of growth and the current political and economic climate, as if there's no possibility of things going wrong.   Howev
Read more