Jaypee Infratech lists below issue price: Should you buy it now?
Jaypee Infratech, a subsidiary of Jaiprakash Associates, listed at Rs 98, below its issue price of Rs 102. In an exclusive interview with CNBC-TV18, Sanju Verma, CEO-Institutional Business, Proactive Universal Group and SP Tulsian, sptulsian.com, speak about the company and give their outlook going forward.
Here is a verbatim transcript of the exclusive interview on CNBC-TV18.
Q: Would you buy it at Rs 93? If yes, then why?
Tulsian: Yes, I will go for the stock at Rs 94 because this is a combination of an infrastructure pure road construction play and the realty. If you cannot take a call on the realty valuation because they have chunk of about 3,300-3,500 acres of land in NCR region, part of that monetisation or maybe the profit booking have started by the company and we have seen that Rs 650 crore profit coming to the company in last 18 months or so and the best part is that even the profits we derived from this construction activities is also exempted under Section 80 I. The company will definitely be making all the efforts to monetise this land value, land parcel over next four-five years, which can give them profit on present valuation, if I go on valuation of about Rs 10 crore per acre, which has been prevailing based on FAR costs in the NCR region, can give them profit of about Rs 8,000-10,000 crore over the next four-five years time.
The management has indicated a turnover of about Rs 2,500 crore by FY11 and of that nothing will be coming out of the road or toll revenue. The entire amount will be coming in purely from the construction activities. On that, we can expect a profit of about maybe Rs 1,000-1,200 crore in FY11 itself, which will be tax exempted minus the MAT liability which will get attracted under section 80 IA.
So they will be making all the efforts to encash this, make the company debt free. Out of that total cost of Rs 9,500 crore, they have availed debt of about close to Rs 5,000 crore. That if can get repaid from FY12 onwards, when the expressway will be operational, maybe in phase from November 2010, but I am taking that to start full-fledged from 1 April 2011, can start giving them a toll revenue close to Rs 700-750 crore in the first year, which can keep on increasing to about Rs 2,000 crore over the next two-three years time.
So if I take all this into consideration and in the present valuation, the present EV of the company, is close to about Rs 18,500-19000 crore. I am not taking the land, which the company will be owning, of about 2200 acres in Aligarh and Agra, purely focusing only on the NCR region which they will be having to the extent of 300-330 million sq ft. As I said the present valuation has been about Rs 1000 per sq ft, the present valuation comes to about Rs 25,000 crore plus. Because if you are negative on the realty parcel or the land parcel then proably one has to take a negative call on all the realty stocks like DLF, Unitech or maybe the other players, which will be tapping the capital market from that region, then probably all other realty stocks look quite stretched and overvalued.
Q: You disagree. What do you see as a fair value for the stock?
Verma: I do not necessarily disagree in entirety. Just to put things in right context, about two-and-a-half weeks back, I was on your channel and the question was asked as what the fair value of Jaypee Infratech is and whether I would subscribe to it. My answer remains the same. I do not see any reason to do a somersault on that. I had said that my gut feel says the stock price will stabilise at lower than the lower end of the band, which means between Rs 95 to Rs 100 or thereabouts. My sense is that the stock will perhaps hold at about between Rs 85 to Rs 90. The reason why I have brought the range down now to Rs 85-90 is simply because the broader picture with respect to overall markets has in the last few weeks become that much more circumspect.
I think in the case of Jaypee Infra, you need to take a call as a potential investor as to whether you are buying it because of its land bank and real estate story or whether you are buying it because its an infrastructure proxy, which combines the best of both construction and real estate. As Mr Tulsian pointed out, I think the negative bit here is that the infrastructure story is on paper at this point in time because the toll revenues from the Yamuna Expressway will optimistically speaking filter in, in FY12, i.e. if the project is completed as per management’s claims in 2011. Were there to be an execution delay, then the toll revenues will start kicking in only by FY13. So the infrastructure story is slightly far fetched at this point in time, which means that as things stand now this has to be valued in the context of what valuation you would give to a real estate player. I think that is where my worry stems from.
I had said this in the past and I am reinforcing that, the fact of the matter is that a DLF or a Unitech is available to you between 15 to 17 times on FY11 estimates. On FY12 estimates, DLF and Unitech are even cheaper between 11-13 times at current prices and both these companies will give you a compounded earnings growth of between 35-40% plus over the next two years.
Now, in the case of JP Infra they are lot of if’s and but’s. The point that I want to make is that A) first speaking of the expressway what if the toll charges are not in the region of 1.8-1.9 per km, which most analysts seem to be working with maybe it will be in the region of 1.3-1.4 per km, which is what is charged along the Mumbai- Pune expressway a far more industrialised belt. So to start with, to assume that the toll revenues in FY12 will be at Rs 500 crore, assuming a toll charge of 1.8 per km is to start with very optimistic. If that were to come down to 1.4 then you are not talking of Rs 500 crore by way of revenues from the expressway, but just about Rs 350 to 390 crore. So there are too many variables in the equation, which make the picture not as pretty as it seemingly would see at this point in time.
Speaking of it being a real estate proxy, forget about price to earnings, maybe that is necessarily a good parameter to evaluate a real estate play be it a DLF or Unitech or Jaypee Infra not withstanding the fact that Jaypee Infra is anyway trading at a 25% plus premium to its most established peers within the space. Even if you were to look at it from an EV to EBIDTA, from a price to sales, or even a price to book; on a price to book, mind you DLF and Unitech are trading at between 1.3-1.5 times whereas as things stand now Jaypee Infra is at three times plus, which is certainly expensive.
So my sense is it is a good bet for alpha seeking investors, people who are chasing yield. But for people who are circumspect, people who are wary, I think it would do them good to certainly wait for a while because I won’t be surprised if this trades down further. Yes, the management has a stupendous track record behind it.
Q: Is it a fair argument that you should not be paying a premium to DLF and Unitech for Jaypee Infra for the real estate business?
Tulsian: Firstly, I disagree on that. But even if I just keep aside the comparison purely been made of Jaypee Infra with DLF and Unitech, first let me make this comparison with IRB because Ms Verma has raised that point and it is a very valid point that they have been getting revenue of 1.8 per km. But one must remember that IRB today is enjoying a PE multiple of over 20 plus and even if I attribute Rs 1000- 1200 crore for their land parcel, which they owning to the extent of 600 acres along the expressway. I am taking their 66% share in that 900 odd area of land and the residual of the life of that expressway with IRB has remained only for nine years and in spite of knowing that the market is giving a PE multiple of 22.
Now if you take the case of Jaypee Infra, I have not seen any road concession agreements spanning over 25- 27.5 years, while this company is enjoying a concession of 36 years. If you see the original contract, I am not going by that, the original completion time was March 2013, but I have heard the management saying in morning that they will be starting in phases, starting from November 2010 and will be fully operational by March 2011. So I don’t have any reason to disbelieve the management. Based on that, I have presumed that the expressway will fully start from April 2011, so as to take total profits or the effect of that reflecting into the financials from FY12. Looking at the management guidance, they have said that Rs 500 crore is the likely turnover. In fact I have calculated revenue at 1.2 only. If you calculate the 165 km with a traffic volume of about one lakh car on both the way because that is the indication which we have been having getting, one may differ there because as Ms Verma has taken that as Rs 400 crore while I have taken that at Rs 650-700 crore. So that can again differ there because that depends on the traffic volume. So I think there are many advantages, I don’t think you have any apprehensions or any reason to say that infrastructure project is only on paper.
Now, replying to questions of comparison with DLF and Unitech, if you see all the lands which are owned by DLF and Unitech, they have been in bits and pieces, maybe a 50 acre with one, while they will be having the advantage of having about 3000-3300 acres and in fact we have seen the accrual of profit coming in. Again if I rely on the managements guidance of Rs 2,500 core again for FY11 and as I said of that I will be estimating a profit of about Rs 1,200 crore because their cost is not more than Rs 50 lakh per acre because the advantage with them that government is acquiring for them and government is the acquisition agency for them and they are giving all the land acquired by the government to the company at cost. So you have a big gap between the acquisition cost and the expected realisation per acre. As I said I am taking that at present at about Rs 10 crore per acre while their acquisition cost is somewhere between Rs 50-60 lakh. I am not taking their average price because the average price for the entire including Aligarh and Agra is about Rs 27-28 lakh per acre. But if I just confine to NCR region, it is not more than 50-55 lakh. And as I said, I have been relying more on the early realisation of the real estate parcel by the company, so as to make the company debt free which will largely be going in its favour.
If you take FY11, I think they will be having an EPS of close to about Rs 9 because their equity is 1,400 crore and if I expect a profit of about Rs 1200 crore they will be having an EPS of 9.
Even if I make a comparison on PE multiple, again which is not the right way, in fact EV is the right method for valuing a real estate company, but even if it take a EPS of 9 for FY11, I think the share is ruling at about PE multiple of about 10, while Ms Verma has said that for DLF and Unitech we have seen them ruling somewhere between 13-15 for both the companies.
Q: Is it fair rebuttal?
Verma: I think Mr Tulsian is even more optimistic than the management because the management has guided for completion of the expressway only by December 2011 and Mr Tulsian has made an assumption that it will be completed and will be commencing operations from April 2011, clearly that is very optimistic.
Second, the only thing that I have to say to Mr Tulsian is that assuming 100,000 passenger car units on the Noida-Agra-Yamuna Expressway is being highly optimistic. Even the Mumbai-Pune expressway, there on an average the toll is to the tune of 40,000 passenger car units a day. I am assuming the Yamuna Expressway sees 50,000 passenger car units a day and if you take at the rate of 1.8 km you get revenues of Rs 500 crore, if you take that at 1.4 km, you get revenues of Rs 388 crore to be precise. So the number Rs 650-700 crore that Mr Tulsian is basing his assumptions on looks a bit far fetched. To that extent, my only rebuttal is, yes, if you are assuming this is a real estate proxy, it is clearly expensive and needs to trade lower. If you are taking a call that there will be no execution delays, the management will be able to monetise the real estate land bank to be effectively able to garner cash to pay off for the Yamuna Expressway and things will start on time as claimed by the management then you have steel on hand. But at this point in time I think it is only for yield chasers because my sense is this will certainly settle down between Rs 80-90, if not lower.
Source : Money Control
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Category: Broker tips
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