Angel Broking neutral on Jaiprakash Associates

Angel Broking's report on Jaiprakash Associates: Event: The Jaypee group has reached an agreement to sell its 4.8mn tonne Gujarat cement plant (a unit of Jaypee Cement Corporation [JCCCL] which is a wholly owned subsidiary of Jaiprakash Associates) to UltraTech Cement. The Gujarat plant consists of an integrated cement plant at Sewagram and a 2.4mn tonne cement grinding unit at Wanakbori. The plant also has a 2500DWT jetty at Kutch which is used for clinker and coal movement in addition to a 57.5MW coal based captive power plant. The enterprise value of the transaction is to be Rs 3,800cr excluding actual net working capital. As per the agreement, UltraTech Cement will take over the debt of `3,650cr of Jaypee's Gujarat unit and will issue equity shares worth `150cr (with the fresh issue resulting in dilution of no more than 0.32 percent of its capital) once the transaction is complete. As per the Management, the transaction is expected to be completed within 7-9 months subject to approval of shareholders and creditors, sanction of the Scheme of Arrangement by the High Courts, and approval of the Competition Commission of India besides other statutory approvals.

Impact: The deal brings in a much needed relief to Jaiprakash Associates as it would help in reducing its huge debt. The valuation of the deal translates into US$124/tonne (assuming a USD rate of `64), which we believe is reasonable considering the current valuation of Ambuja Cements (US$132/tonne) and its large cap peers (at an average of US$138/tonne) on a trailing basis. On the completion of the transaction, the deal would help the company reduce its net debt by 6% on a consolidated basis; thus resulting in a boost in its profitability.

Outlook & Valuation: We believe the deal is the first step in the right direction and brings in a much needed relief to the company as it would help reduce its debt. The Management has guided to reduce its consolidated debt by ~Rs 15,000 crore in FY2014 through monetization of its land parcel, cement business, and thermal & hydro assets. Going forward, we believe deleveraging the balance sheet through monetization of assets would help reduce the huge debt which continues to remain an overhang on the stock. Hence closure of such a deal would be positive for the company. However, due to recent increase in the stock price we recommend a Neutral rating on the stock.

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