Jaypee Infratech

The stock of Jaypee Infratech could be a dark horse play on the infrastructure and real estate segments in the northern region of the country. Investors with a penchant for risk can consider investing in the stock with a 2-3 year perspective.

Jaypee Infratech

Jaypee Infratech

Jaypee Infratech Grey Market Premium

Company Name	Offer Price (Rs.)	Premium (Rs.)
Talwalkars Better Value Fitness Ltd.	128	20 to 22
Nitesh Estate	54 to 56	Discount
Tarapur Transformers	75	2.50 to 3
Mandhana Industries Ltd.	120 to 130	5 to 5.50
Tara Health Foods	180 to 190	Discount
Sutlaj Jal Vidhut Nigam (SJVNL)	26	1.50 to 2
Jaypee Infra	102 to 117	Discount

Jaypee Infratech IPO Note

Jaypee Infratech IPO Note

Jaypee Infratech IPO Review

Investors with a penchant for risk can consider the initial public offer of infrastructure developer, Jaypee Infratech, a subsidiary of the listed Jaiprakash Associates. A unique combination of infrastructure and real-estate development, with each segment driving the other's prospects, is the company's key advantage.

The company is in an advanced stage of expressway construction that is likely to be commissioned two years ahead of schedule. This combined with the availability of low-cost land for real-estate development (with a good part in Noida) provide earnings visibility to Jaypee Infratech. Revenues and earnings could be lumpy until 2011, after which the expressway would start earning toll revenues. Income from real-estate development would be the key contributor to revenues until such time.

The primary risk to this recommendation is that both the business segments are working-capital intensive and, until such time, the expressway is complete, liquidity could be tight. Inability to fully monetise the land bank would also mute growth.

The offer price band is Rs 102-117. Retail investors would get a 5 per cent discount on the offer price. Post- discount, the company's share is likely to trade at 24-27 times its annualised per share earnings for FY-10 on an expanded capital base on listing.

This is at par with infrastructure industry average. On a price-to-book basis, the valuation comes to 3.7-4.2 times; at a marginal discount to IRB Infrastructure Developers, which has a larger portfolio of roads in operation. On an enterprise value to earnings before interest, depreciation, taxation and amortisation (EBITDA) basis, Jaypee Infratech appears to be valued closer to real estate players rather than infrastructure. Given that revenues from real estate are likely to be higher than income from toll, the valuation appears justified.

The company and offer

Jaypee Infratech was launched as a special purpose vehicle in 2007 to implement a single road concession agreement — Yamuna Expressway — that connects Noida to Agra through a 165-km single expressway, built in Uttar Pradesh. The concession would allow Jaypee Infratech to operate and collect tolls for a period of 36 years. This comes with about 6,175 acres of land (translating in to 530 million sq ft of area) for real-estate development for a lease period of 90 years. The land can be developed or sold at the discretion of Jaypee.

The company proposes to raise about Rs 1,650 core through fresh issue of shares, while the parent company, Jaiprakash Associates, would receive about Rs 700 crore through an offer for sale. The offer proceeds would be utilised predominantly to fund the expressway.

De-risked

Jaypee Infratech has timed its capital market foray after two key risk factors have been addressed. One, the entire Rs 6,000 crore debt, of the Rs 9740 crore of project cost has been tied up. The remaining funding has been done through promoter contribution and cash flow from real-estate activity. The current offer proceeds would go towards funding only 15 per cent of the project cost. Two, the company is in possession of 96 per cent of the land required for the expressway and expects to complete the project by 2011, two years ahead of the 2013 target. Three, Jaiprakash Associates, the parent, with wide experience in execution of large projects, is the contractor.

Besides, 70 per cent of the land proposed for real estate has also been handed over to the company.

Due to the above factors, Jaypee Infratech enjoys several advantages: The company would enjoy cost-efficiencies, given Jaiprakash Associates' captive cement production and ownership of stone aggregates. The company is unlikely to be leveraged further as the projects have tied up full funding. The company has stated that it would keep the real-estate development self-financed, as it can sell land to monetise it, apart from developing the same.

Low-cost land

Towards this end, Jaypee has already booked profits for the year ending FY-09 and nine months ending December 2009 by selling residential and commercial plots. It has also initiated development of 24 million sq ft of five residential and one commercial project, 88 per cent of which has been sold and advance received, although none has reached the revenue-booking stage. Jaypee's biggest advantage in this project is the lucrative land bank that has been leased to it. At the anticipated cost of Rs 2,619 crore (besides an insignificant annual lease), the land cost works out to Rs 25 lakh per acre. It has also stated that the cost of a small portion of the land sold in Noida was Rs 50 lakh per acre a couple of years ago.

Weighed against about Rs 5 crore per acre incurred by a few other large players in Noida in recent times, Jaypee's deal could be termed a steal. This edge would allow Jaypee to price its projects aggressively, especially in Noida. The company did launch its initial phase of residential projects at a list price of Rs 2100 per sq. ft, drastically lower than competitors' rates. For the nine months ended December, Jaypee's sales were Rs 525 crore and net profits Rs 399 crore, the high margins arising solely on account of selling plots. The 76 per cent net profit margin is unlikely to sustain once the company's development costs and revenue are brought into the books.

A good part of the revenue for the nine-month ended December came from associate companies for hotel and certain other developments in the township. Going forward, as revenue from residential projects are brought into books, income from associates may dwindle as a proportion of the total revenue. With 88 per cent pre-sales and the entire current development to be completed by 2013, the existing projects could well manage their working capital from advances; even as toll revenues are expected to kick in from 2012.

Real-estate development may turn out to be the key driver of revenues and improve prospects for the expressway. After all, the existence of crucial infrastructure such as road, power (hydro power to be developed by associate company) and water in integrated townships are the key attractions for buyers of property in Tier-II and Tier-III areas.

Toll

Toll revenues on the road project would be subject to the UP Government's toll regulations, which currently allow about Rs 1.9/km as against Rs 1.4/km for the Mumbai-Pune Expressway. Jaypee may have to start at modest toll rates to attract traffic. The expressway has the advantage of operating within a single State, thus reducing hassles of inter-state movement for commercial traffic. Tourist destinations such as Mathura (along the expressway) and Agra candrive traffic volume.

An international airport and extension of Delhi Metro are other factors that could drive traffic. Nevertheless, the expressway cannot at this point look forward to volumes similar to the industrialised Mumbai-Pune route.

Lack of volumes may, however, be compensated by real-estate activity. It is perhaps for this reason that the government has chosen to bundle this expressway project with such massive tracts of land for real-estate development.

The offer closes on May 4.

via BL

Jaypee Infratech IPO subscribed 82%

Receives bids for 18.29 crore shares

The initial public offer (IPO) of infrastructure development firm Jaypee Infratech received bids for 18.29 crore shares compared to 22.17 crore shares on offer. The IPO was subscribed 82% by 16:00 IST on the first day of the issue today.

The company has set Rs 102-117 per share price band for its initial public offer. Retail investors will be allotted shares at a discount of up to 5% to the issue price that will be determined as per the book-building route. The issue closes on 4 May 2010.

The IPO is a combination of fresh issue of equity shares aggregating up to Rs 1650 crore and an offer for sale 6 crore equity shares by Jaiprakash Associates.

Jaypee Infratech is engaged in the development of the 165-kilometer Yamuna Expressway (access controlled concrete pavement expressway) connecting Greater Noida and Agra. The project which includes development of 5 integrated townships along the expressway, is scheduled to be completed by 2011.

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.