Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs112
Current market price: Rs79
Price target revised to Rs112
We spoke to the management of Jaiprakash Associates Ltd (JAL) recently and the key takeaways from the same are as follows.
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With regard to the amalgamation scheme proposed in February 2008, the court has directed JAL to convene the meeting of the shareholders on March 27, 2009 to approve the proposed scheme and the proposed provisions relating to the creation of a trust that is likely to hold the cross holding of JAL shares.
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As per the company’s data, the amalgamation scheme, if approved, is likely to result in an additional issue of 21.8 crore equity shares. Out of the 21.8 crore equity share dilution, the new trust will hold 92% of the new shares. Hence, there will be an equity dilution of 18.4% of shares if the holding under the trust is not extinguished and an equity dilution of 1.4% of shares if the holding under the trust is extinguished. However, we believe the shares under the trust would be utilised as a funding avenue to finance its real estate and infrastructure projects. In such as case, we expect an earnings dilution of 10-12% in FY2010.
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JAL has also announced that it has repurchased and extinguished the zero coupon convertible bonds (ZCCBs) aggregating to a face value of US$32 million, which were purchased at 45-50% discount to the face value. As per our working, if the repurchase was funded through external commercial borrowing (ECB), it would lead to saving of US$21-22 million for the company over the period of ZCCBs and would create value for the shareholders.
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Since, these ZCCBs constitute only 8% of the total ZCCBs aggregating to US$400 million and close to 2% of the total debt, this move is not likely to have any major positive impact on the financials of the company. However, we highlight that the company’s move is in the right direction in terms of creating value for the shareholders and we could see further foreign currency convertible bond (FCCB) buyback by the company (if the Reserve Bank of India [RBI] permits), going forward.
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We have revised our estimates to factor in the delay in the commissioning of the cement capacity and the delay in the execution of real estate projects. We have also removed the dilution on account of FCCB III (see FCCB table below), which are deep out of the money. Consequently, we have revised our earning estimates to Rs5.9 per share in FY2009 earnings estimates and Rs6.7 per share in FY2010 earnings estimate.
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At the current market price, the stock is trading at 13.3x FY2009 earnings estimate and 11.8x FY2010 earnings estimate. We continue to value the company using the sum of the parts (SOTP) valuation methodology and value the stock at Rs112. Though, there is likely to be significant value proposition from the real estate and power businesses in the long run, we highlight that the equity dilution from the proposed amalgamation and the proposed rights issue of Rs1,800 crore (which could further dilute to 22.8 crore equity at the current market price) are likely to remain an overhang on the stock in the near term. Hence, we maintain our Hold recommendation on the stock.
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