Hold Jaiprakash Power Ventures; target of Rs 49: Emkay

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Hold Jaiprakash Power Ventures; target of Rs 49: Emkay

Emkay Global Financial Services has recommended hold rating on Jaiprakash Power Ventures with a target of Rs 49, in its February 17, 2011 research report.

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Emkay Global Financial Services has recommended hold rating on Jaiprakash Power Ventures with a target of Rs 49, in its February 17, 2011 research report.

"Jaiprakash Power Ventures (JPVL) board has approved the amalgamation of Bina Power (Phase 1 -500MW & Phase II-1000MW) and Karcham Wangtoo (1000MW) with itself effectively 1st April 2010 subject to various approvals. JPVL will issue 2 shares to shareholders of Bina Power for every 13 shares held and Karcham Wangtoo shareholders to get 1 share of JPVL for every 5 shares held. Post amalgamation Bina Power (presently 100% subsidiary) and Karcham Wangtoo (presently 56.9% subsidiary) will become a part of JPVL. Pursuant to this scheme the company will issue 556mn shares (21% dilution) -185mn shares to JAL for 43% stake in Karcham Wangtoo and creation of 371mn treasury stock."

"Reasons for amalgamation - (1) access to cash flows from Bina and Karcham projects which go on stream in FY12E without having to pay dividend distribution tax, (2) consolidate all IPP projects under one entity - JPVL & (3) creation of treasury stock to help raise funds later on. Effectively in the whole transaction Karcham's 43% stake is being transferred to JPVL from JAL, for the issue of 185mn shares or 8% dilution. At CMP of Rs42/Share, the value of 8% dilution works out to Rs 7.8 bn. Considering this being the value paid for 43% stake, it is 0.85xcurrent Book value of Karcham (Rs 21.45 bn). This we believe is positive for JPVL as the project is slated to commission in FY12E. Considering current market price to be the fair value of JPVL, the acquisition of Karcham is 3% value accretive."

"Current valuations imply long term merchant tariff of Rs 3.3/unit vs our estimate of sustainable merchant tariffs at Rs 2.7/unit. Further, equity dilution is likely to be an overhang. At CMP of Rs 42 per share, the stock is trading at x FY12E Book Value. We maintain our Hold rating. Also considering we have been optimistic in our assumptions, we are keeping target price unchanged at Rs 49 per share," says Emkay Global Financial Services research report.

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