Despite the 53% YTD underperformance to the BSE Sensex, we downgrade Jaiprakash Associates from ?hold? to ?sell? with a revised SoTP-based target price of R42 (from R55) as the consolidated debt at R6,1200 crore as per the annual report came in at cR10,000 above our estimates.
In the current weak cement demand environment, JPA?s high degree of operating leverage leads to a 14%/9% cut in FY14E/FY15E EPS at our end, respectively. The residual cement asset value based on the current price of listed subsidiaries is $160/t, which appears expensive given its Ebitda/t of $12/t. Value unlocking of businesses at a price higher than replacement cost could result in upside risks.
JPA has one of the highest operating leverages in the industry. This could work adversely in the current weak demand scenario. We cut cement volume growth by 2% and raise the price by 1% resulting in FY14E/FY15E earnings falling by 14%/9%, respectively (35- 50% below consensus).
Our analysis, based on current market prices of listed subsidiaries, suggests the cement business is commanding an EV/t of $160/t vs $113-158/t valuations for industry leaders. While the stock has historically bottomed out at 1x P/B, it may tread lower as consolidated net debt to Ebitda has risen to 9x. This makes us believe that equity risk premiums could weigh down its valuations.