Jaiprakash Associates
Recommendation: Buy
Price target: Rs102
Current market price: Rs91
Price target revised to Rs102
Result highlights
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Q2FY2013 earnings below estimate: In Q2FY2013 JP Associates Ltd (JAL) posted a net profit of Rs128 crore (a decline of 48.5% year on year [YoY]). The same was below our estimate on account of a lower than expected profitability of the cement business and a 23.3% surge in the interest outgo YoY.
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Cement and real estate divisions support the revenue growth; construction division offsets the benefit: The revenues from the cement division, accounting for over 45% of the overall revenues, grew by an impressive 22.9% on a year-on-year (Y-o-Y) basis (largely supported by a growth in the average blended realisation). The real estate division also witnessed a healthy revenue growth of 32.7% YoY to Rs268 crore in the same quarter. However, on account of a 17% Y-o-Y decline in the revenues from the construction division, the overall revenues of the company could grow by just 4% YoY to Rs2,983 crore.
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OPM expanded YoY and sequentially: On the margin font, the operating profit margin (OPM) expanded by 20 basis points YoY and by 50 basis points quarter on quarter (QoQ) to 26.5% during the quarter. The margin expanded on account of an improvement in the profitability of the cement division (an earnings before interest and tax [EBIT] margin of 9.7% as against that of just 2.3% in Q2FY2012) but was lower than our estimate. The margin of the construction division stood healthy at 34.1%, which was much higher than our estimate on account of the claims received for the earlier period and a better revenue mix. On the other hand, the profitability of the other division, namely real estate, contracted to 35.5% from 43.3% in the corresponding quarter of the previous year.
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Surge in the interest outgo and depreciation charge dents earnings: The interest outgo increased by 23.3% YoY to Rs464 crore and the depreciation charge increased by 23.4% YoY to Rs178 crore during the quarter. Hence, at the net profit level the company posted a decline of 48.5% YoY to Rs128 crore (as compared with a 4.8% growth at the operating level).
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Earnings estimates for FY2013 and FY2014 downgraded: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to factor in the lower than expected volume growth in the cement business. We have lowered our margin estimates mainly to factor in the cost pressure in the cement business. We have also factored in the higher interest cost in our estimates. Consequently, our revised earnings per share (EPS) estimate for FY2013 now stands at Rs4 and that for FY2014 works out to Rs4.5.
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Maintain Buy with a revised price target of Rs102: We continue to like JAL due to its diversified business model and aggressive expansion plan. The near-term trigger in the stock will be the likely stake sale in Jaypee Cement Corporation as it will de-leverage the JAL balance sheet to some extent. In terms of valuation, we continue to value the stock using the sum-of-the parts (SOTP) valuation method and arrive at a value of Rs102 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs102.
SHAREKHAN SPECIAL
Q2FY2013 Auto earnings review
Subdued Q2; expect recovery in H2FY2013
STOCK UPDATE
Key points
Earnings boosted by M&M and Apollo Tyres
In Q2FY2013, the aggregate revenues of the automobile (auto) companies under our active coverage reported a revenue growth of 12.7% and a net profit growth of 6.3% as compared with the corresponding period of the previous fiscal. Given the prevailing tough macro-economic conditions, the performance appears to be robust due to a strong growth reported by both Mahindra and Mahindra (M&M) and Apollo Tyres. Excluding M&M, the aggregate revenue growth drops to 4.9% and the earnings decline by 2.5% as most of the other companies reported a decline at the profit after tax (PAT) level.
Auto companies including those under soft coverage report profit decline
Similarly, Sharekhan's auto tracking universe (including nine companies under soft coverage) saw a revenue growth of 13.2% year on year (YoY) but reported an earnings decline of 2.2% YoY. Ex M&M, the revenues grew by 11.1% while the profit declined by 6.2% during the quarter under review.
ALL added to our conviction list on robust Q2FY2013 performance
During the last three months, most of the stocks under our coverage, except M&M, had been kept on Hold recommendation. We recently added Ashok Leyland Ltd (ALL) to our Buy list due to an improved growth and margin outlook (refer to our Stock Update on ALL dated November 9, 2012).
Apollo Tyres, M&M and Suprajit outperform on earnings front
Most of the companies under our tracking universe reported an earnings decline as a moderating revenue growth resulted in operating de-leverage which affected the profitability. Only M&M amongst the original equipment manufacturers (OEMs), and Apollo Tyres and Suprajit Engineering (Suprajit) in the ancillary space reported an earnings growth during the quarter. Exide Industries (Exide) reported a jump in the earnings mainly due to the low base effect of the corresponding period of the previous year.
Outlook and valuation
We expect the automotive volumes to recover in H2FY2013 on the back of the festive season in Q3FY2013 and an improved economic outlook with the easing of the interest rates expected in Q4FY2013. Raw material prices are expected to remain subdued. With a recovery in the volumes, the benefits of operating leverage are expected to result in a margin improvement in H2FY2013. M&M remains our preferred pick in the auto sector.
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