The Street seems to be worried about the company’s expansion plans for cement at a time when demand is expected to slow down.
The Jaiprakash Associates stock fell to a 52 week low in intra-day trades earlier this week. Since it became a part of the BSE Sensex, in mid-March 2008, the stock has come off by 46 per cent –a huge underperformer given that the Sensex has lost just 15.5 per cent during that time. That is somewhat surprising because the Rs 3,985 crore firm did fairly well last year to post an increase in sales of 14.5 per cent and a rise of 47 per cent in net profits.
What seems to be worrying investors is the cement business which contributes about half the company’s revenues. Last year JPA spent about Rs 3,080 crore on capital expenditure of which three –fourths or Rs 2,270, was spent on adding cement capacity--JPA plans to double capacity to nearly 20 million tonnes this year.
However, according to industry watchers, demand for cement is coming off slowly and is expected to grow by just 10-12 per cent over the next three years. It could, therefore, lag supply which is expected to increase by 20-22 per cent compounded annually over FY08-11.
Thus, prices could come off by 8-12 per cent over the next 12-15 months. In the June 2008 quarter, cement and cement products, at JPA, grew by 13 per cent y-o-y with volumes increasing by about 11 per cent and realisations up 1.7 per cent. The segment margin came off by 280 basis to 30.3 per cent y-o-y.
JPA's construction business should do well since it is executing hydro power projects for a capacity of 4,290 MW. It currently operates 700 MW of hydro power capacity and the order book stands at around Rs 12,000 crore. In the June 2008 quarter, construction and engineering grew 17 per cent with the segment margin up 180 basis to 21 per cent y-o-y.
JPA's promoters have recently allotted themselves 120 million warrants —about 9 per cent of fully diluted equity-— in addition to the 50 million warrants, priced at Rs 397 per share, allotted in January 2008, and due for conversion in July 2009. At the current price of Rs 135 the stock trades at 24.5 times its estimated FY09 earnings.
