Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs266
Current market price: Rs237
To raise funds through equity dilution in subsidiary
The management of Jaiprakash Associates Ltd (JAL) has announced that the company is looking at diluting 15% stake in its subsidiary, Jaypee Infratech Ltd (JIL), for Rs2,500 crore. JIL is constructing the 165-kilometre-long six-lane Yamuna Expressway (formerly Taj Expressway) connecting Greater Noida and Agra. The company will file the draft red herring prospectus for JIL in a week and will hit the markets with a public offering in January 2010.
Assuming JAL makes a fresh issue of equity to raise Rs2,500 crore, the indicated equity value of JIL works out to around Rs16,670 crore. Accordingly, the derived value of JAL?s holding of 95.5 crore of JIL?s shares works out to Rs14,005 crore. This is marginally higher than the value of Rs14,512 core assigned by us in our sum-of-the-parts (SOTP) valuation of JAL.
However, we are maintaining our valuation for JAL and will revise the same once the details of the proposed public issue are made available. We continue to value the stock using the SOTP valuation methodology and maintain our price target of Rs266. Though we see JAL emerging as a leading infrastructure player in the next few years, we see a limited upside from the current level based on our SOTP valuation. Hence, we maintain our Hold recommendation on the stock. At the current market price the stock is trading at 24.8x FY2011 earnings estimate.