>JAIPRAKASH ASSOCIATES LIMITED (MORGAN STANLEY)

Power Merger Increases Probability of Our Bull Case

Quick Comment: The board of directors of Jaiprakash Hydro Power Ltd. (Jaiprakash’s listed power subsidiary) at its meeting on July 3, 2009, approved the amalgamation of Jaiprakash Power Ventures Ltd (JPVL) with Jaiprakash Hydro Power Ltd (JHPL), with effect from April 1, 2009. The board also authorized, subject to approval at the ensuing Annual General Meeting, the raising of up to Rs15 billion by way of QIP / FCCBs / ADRs / GDRs / Follow-on Public Offer (FPO).

Implications on Fund Raising: We have in the past pointed out that we believed that a funding gap of around Rs30 billion existed for Jaiprakash centered on the power business. The announced fund raising coupled with the securitization of the cash flows from the existing plants (Baspa II and Vishnu Prayag) would in our opinion cover these funding needs.

Implications on Jaiprakash Stock Price: In our opinion, this merger of Jaiprakash’s listed (JHPL) and unlisted (JPVL) power subsidiaries should result in significant value unlocking for Jaiprakash’s shareholders. Based on the merger ratio (issue of three shares of JHPL for one share of JPVL), Jaiprakash’s shareholding in the merged entity would be 76.3%. Using the last close of JHPL, that indicates a value of Rs126/share for Jaiprakash’s holding in the merged entity, close to the Rs143/share value we use in our bull case (Exhibit 3), in which we price the business of listed peers (Exhibit 2).

Remains Top Pick in our Coverage Universe: Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses: cement, construction, power, and real estate. We believe the company has sustainable advantages in each of its businesses, and it remains the top pick in our coverage.

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