Jaypee Infratech IPO Analysis

Part of the Jaypee group, Jaypee Infratech (JIL) is a special purpose vehicle promoted by Jaiprakash Associates (JAL) to develop, operate and maintain the Yamuna Expressway project connecting Noida and Agra in Uttar Pradesh. As viability gap funding for the expressway project, the company has got the right to develop for residential, commercial, amusement, industrial and institutional purpose 25 million square meters (or 6175 acres or 2,500 hectares) of land along the Yamuna Expressway at five locations. The overall cost of the project is Rs 9739.29 crore.

The build-operate-maintain-and-transfer Yamuna Expressway project is a six-lane access controlled expressway (extendable up to eight lanes) awarded originally to Jaiprakash Associates by the Yamuna Expressway Development Authority (YEA), the nodal agency appointed by Government of Uttar Pradesh (GoUP), with a concession of 36 years. The Yamuna Expressway project was subsequently transferred to JIL by its parent in 2007.

The construction of the Yamuna Expressway is required to be completed by April 2013. Based on the progress achieved so far, construction of the project is to be completed by 2011. It is estimated about 4,042 acres of land is required. JIL had taken possession of approximately 3,897 acres end March 2010. In addition, the company requires about 1,018 acres for construction of related structures (such as toll plazas). It has taken possession of 183 acres. YEA is expected to make balance land available to it soon.

Pursuant to the terms of the concession agreement and the choice of land parcels acquired for development, noted in a letter dated 12 July 2003, YEA has acquired and leased about 148.27 million square feet of land to JIL in four of the chosen five sites for lease of 90 years. YEA is acquiring the balance 105.84 million square feet (i.e., 2429.69 acres) for the five sites. The cost of the land leased out by YEA for expressway and real estate development is equal to YEA's cost in acquiring such land (based on the actual amount paid to land owners with no additional charge) plus rental equal to Rs 100 per hectare per year.

To date, JIL has commenced development of its land at Noida and has launched five projects under the Jaypee Greens brand, Jaypee Greens Klassic, Jaypee Greens Aman, Jaypee Greens Kosmos and Jaypee Kensington Park. Each is a residential unit development, residential plot project and a commercial plot project with planned saleable area of 24.34 million square feet. These projects, launched between November 2008 and February 2010, are targeted for handover in calendar years 2011 and 2013. The completion of a real estate project is to take three to four years, while the completion of all phases of an integrated township, such as Wish Town, can take significantly longer. Moreover, the company has also engaged SOM India LLC and Skidmore, Owings and Merrill India to do master plan for approximately 2,471 acres of land in the Gautam Budh Nagar (other than Noida) district.

While Jaiprakash Ventures Pvt Ltd (JVPL) provides JIL design and engineering services (including for toll plazas and the toll system), JAL provides civil works contract as well as sales and marketing services and related corporate services for development of the Yamuna Expressway. The scope of JAL also includes selection, engagement and oversight of consultants and subcontractors, procurement and transportation of certain building materials, construction services,

The proceeds from the fresh issue amounting Rs 1650 crore is to be used to part finance the Yamuna Expressway project and general corporate purpose. The proceeds from offer of sale will go to the selling stakeholder, JAL.

Strengths

Promoters JAL and the Jaypee group have strong track record of successfully executing complex projects including hydropower projects. The Jaypee group, though, has no prior experience of developing and operating expressways.

The development of expressway along with ribbon development of real estate projects will benefit each other. Earnings from real estate will subsidise the development of expressway and give additional traffic during and after full development. Better infrastructure including connectivity will increase the marketability and price for realty projects along the expressway.

Of the expected total land bank available for development, 885 acres is in Noida. An additional 2,470 acres are also located in the national capital region (NCR). These are the prime realty hotspots of the country. The established brand of Jaypee Greens of Jaypee Group in the NCR makes marketability of the realty projects easier.

Of the 24.34 million square feet of saleable area to be used for the five residential and one commercial project, approximately 88% had been sold per square foot end March 2010.

Relatively low-cost land reserve as the average cost of land acquired so far for construction of the expressway and real estate development is approximately Rs 26.7 lakh per acre.

Had paid in full (excluding annual lease rental) for approximately 98% of total expected land requirement for the expressway and real estate projects end February 2010.

Weaknesses

Of the 4,042.43 acres required for the expressway project, only about 3,896.66 acres have been acquired and leased. The balance 145.77 acres are yet to be acquired and transferred. The timely completion of the expressway project and flow of toll revenues largely hinge on getting possession of the balance land. Similarly, yet to get 835.33 acres of the 1,017.86 acres required for related structures such as toll plazas. For real estate development also it is yet to get possession for 2426.69 acres of land out of the total 6175 acres of land. The entire land for construction of structures for the Yamuna Expressway and real estate development is to be received by June 2010.

Though business is expressway development, major revenue is expected to come from unlocking of value of land reserves. As real estate is a cyclical business, timely completion and right product offering are crucial for success. Moreover, as a significant part of the land parcel is out of the NCR region and in the Aligarh and Agra districts, ability to unlock value from this land parcel has to be seen. Wait may be longer if the market is not conducive to unlock such remote land parcel, thereby money spent on land acquisition getting blocked.

Neither YEA nor GoUP or any other relevant body will permit construction of any competing expressway or road that may affect the toll revenue of the SPV. The Yamuna Expressway has to compete with existing National Highway (NH)-2.

Construction services have been given to promoter JAL on cost plus basis. Any escalation in material cost is likely to impact profit because increase in cost of development cannot be passed on to the customer as the price is typically agreed prior to or in the early stages of construction. Similarly, toll rates are linked to the wholesale price index and subject to government policies and applicable law.

Security provided for certain of promoter's obligations and vice versa. These arrangements may result in potential conflicts of interest.

Promoter JAL has two more wholly-owned subsidiaries developing of expressways: Himalayan Expressway (HEL), implementing the four-laning of the Zirakpur-Parwanoo section of NH-22, and Jaypee Ganga Infrastructure Corporation(JGICL), awarded a concession to develop a 1,047-km eight-lane access-controlled expressway connecting Greater Noida with Ghazipur-Ballia. Jaypee Agra Vikas (JAVL), a group company, has been awarded a concession to develop a 20.50-km long six-lane inner ring road in Agra. JAVL, which is to carry real estate development of approximately 3,160 acres of land along the inner ring road, and JGICL, which has a significant interest in real estate development, may prove to be competitors as there is no non-compete agreement in place between group companies.

Fortunes to be closely tied to economic and political developments in Uttar Pradesh.

Noida and the NCR region, where most of the main real estate projects will be located, are and continue to remain competitive markets.

Valuation

JIL is yet to commission its expressway project and collect tolls. Revenue in the fiscal ended March 2009 (FY 2009) have come from sales of undeveloped plots to group companies. Net sales of Rs 525.50 crore and net profit of Rs 398.85 crore was derived from sales of developed plots in the first nine months ended December 2009. The annualized EPS was Rs 3.8 for the nine months ended December 2009.

As JIL's business model is development of infrastructure (expressway) along with ribbon development of real estate, there is no listed comparable peer. The offer price of Rs 102-Rs 117 discounts the annualised EPS for the nine months ended December 2009 by 26.8-30.8 times. Retail individual bidders will get a discount of up to 5% to the issue price.

Investors in such projects should take a long-term view as significant benefits of the expressway and real estate projects will be realised only in the long run.