Small BusinessJaiprakash Associates: Strong numbers
Progress on infrastructure, real estate and power projects will determine value creation in the long run.
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Even as standalone numbers (excluding extraordinary items) reported by Jaiprakash Associates were far ahead of analysts’ expectations, stock markets weren’t impressed. The company’s share price has fallen Rs 4.30, or 2.6 per cent, in the last two days. The Sensex has fallen just 0.4 per cent in the period.
Total income grew a robust 109.2 per cent to Rs 2,964 crore whereas operating profit rose 157.3 per cent to Rs 885 crore. However, as the company’s income from sale of investments fell from Rs 62.6 crore to Rs 3.85 crore and tax outgo jumped nearly three-fold to Rs 188 crore, its post-tax profit (before extraordinary items) growth was slower at 86.8 per cent.
The company, however, booked Rs 211.94 crore as expenses on account of allotment of shares to an employee trust at a discount. Hence, its reported net profit fell 38.9 per cent to Rs 103 crore.
The higher-than-expected growth was largely driven by construction and real estate divisions. The latter is estimated to have reported five-six times rise in property sales around its Yamuna Expressway project compared to the year-ago quarter, which helped drive revenue growth.
However, average realisations were relatively lower, reflecting in the 200 basis points decline in profit (earnings before interest and tax, or Ebit) margins to 42.5 per cent. The construction segment (accounting for nearly 55 per cent of the top line) grew faster with revenues rising 130 per cent year-on-year, which analysts believe was helped by faster execution of in-house projects. ICICI Securities’ analysts believe that inter-segment transaction (in-house projects) will be eliminated during annual consolidation, impacting consolidated financials.
This and the dip in the reported net profit possibly explain the market’s muted reaction to the company’s results. Positively, the division saw its margins double to 25 per cent.
Another reason for the market reaction could be the not-so-impressive performance of the cement division, which accounted for nearly a third of revenues. Given that the company has been actively expanding its cement capacity (from 9 million tonnes in 2007-08 to about 20 million tonnes), its despatch volumes have been growing rapidly. For the December 2009 quarter, these were up 52 per cent at 2.87 MT and helped the division’s revenues rise 61 per cent. However, Ebit margins fell 170 basis points to 24.93 per cent due to lower realisations. Over the next two years, with the company aiming to hike its capacity to 30-35 million tonnes by 2011-12, we can expect the division to see strong volume growth. But, since the domestic supply is expected to outstrip demand, margins are expected to decline.
On the whole, we can expect other key divisions (real estate and construction) to continue to grow at a healthy rate; analysts expect total revenues to grow 15-20 per cent annually over the next two years. They expect that the company’s move to list its real estate subsidiary will help unlock value in the near term, while progress on infrastructure, real estate and power projects will determine value creation in the long run. At Rs 160.20, there is limited scope for appreciation considering that analysts have pegged the sum-of-the-parts value of the stock at Rs 180-185.