>JAYPEE INFRATECH LIMITED: Gestating Assets

■ Balanced risk-reward: We are initiating coverage on Jaypee Infratech (JIL) with an Equal-weight rating and SOTP-based PT of Rs85 per share (20% discount to Mar-11 NAV). We believe that the value in JIL’s assets – 530 msf of real estate along the Yamuna Expressway, which it is developing and will operate on a BOT basis – may take 12-24 months to be unlocked. Near-term
earnings are dependant on just one micro market, Noida, which has strong potential but may slow in ensuing quarters.

■ Key debate: Although the market has mixed views on whether Noida market volumes are sustainable, we believe that the trailing three-quarter new sales data in Noida is quite high – compared with its history and comparable markets (Gurgaon/Bangalore) – and is therefore unlikely to be sustained. Moreover, unsold inventory is rising fast.

■ Fairly valued: The stock is trading at a 15% discount to Mar-11e NAV of Rs106 per share, which we think leaves little upside without significant real estate volumes from (non-Noida) multiple sites, and clear visibility on a new airport in Noida – as in our bull case. On P/E, it is trading at 12.8x and 13.2x F11e and F12e EPS, implying a discount to the sector. Though the stock appears inexpensive on a P/E basis, we highlight that F11 earnings include a high contribution from plot sales and high dependence on Noida.

■ What’s priced in: expressway completion in C11 and steady-state monetization of the Noida land parcel.

■ Key risks include dependence on JAL for project implementation; and potential conflict of interest with JAL (competing projects; control of JIL’s board of directors), a tight balance sheet in the near term, and dependence on Noida for near-term earnings. Other risks are dependence on the political and economic outlook for UP, and JIL’s concentrated land bank.

To read the full report: JAYPEE INFRATECH