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Whatis the reasonto get interested?
*Jaypee Infratech has an integrated business model with a unique combination of infrastructure and real estate play. The company has a twin revenue business model from toll collections and development of township projects adjoining the expressway.
*The current market price of Rs 65 discounts the company’s per share earnings by just 7 times, placing it at a steep discount to listed road developers as well as real estate players.
*The stock trades almost 35% below its offer price in the IPO earlier this year. Couple of months back it was still trading in the 90+ range and has lost value owing to recent negativity around real estate sector.
*The current profits are not a representative of future earnings growth as historical revenues and profits are derived only from real estate development business. Once the expressway is operational, the consolidated earnings will improve significantly.
Yamuna Expressway:
*The Yamuna Expressway is a six lane, 165 km, access controlled project along the lines of Yamuna river, connecting Noida to Agra.
*The project will be operated on a BOT basis pursuant to which, the company will have right to earn toll revenue for a period of 36 years following the completion of the expressway.
*After the completion of concession period, the BOT asset will be transferred to the Yamuna Expressway authority.
*The total cost of the project is approximately Rs 97.3 bn and the company has deployedXXXXX (to beedited)
*It has potential to be widened to eight lanes in future.
*Approximately 4,042 acres of land is required to build the entire expressway. As of 31 March 2010, the company has taken the possession of3,897(to be confirmed) acres of land from the relevant authority.
*Backed by the experience of its parent Jaiprakash Associates, which is executing the contract work, Jaypee Infratech expects the expressway to be completed before the end of 2011, way ahead of the scheduled date of April 2013.
*Early completion of the project should enable the company to generate positive cash flows and pay off the debt taken for funding the project cost if the traffic flow is along expected lines.
*That the real estate component has been bundled with the road project is a positive aspect of the deal, as any dip in toll revenues can be compensated by the real estate segment, even if it means selling plots.
*The six-lane access controlled single-state expressway is however, expected to attract traffic for the following reasons.
*One, the expressway operates in a single State and avoiding inter-State hassles involved especially for commercial traffic.
*It also touches a number of tourist destinations such as Mathura and Vrindavan besides Agra.
*Two, while there is an existing four-lane national highway (NH2), the Yamuna Expressway is expected to reduce average travel time by two hours compared with the former.
*Three, the existing NH2 would be tolled soon, as six-laning of the route has been awarded to a private player.
*This, together with the fact that it would pass through three States thus invoking octroi charges, would increase the cost of travelling in NH2.
*Further, the expressway is also likely to benefit from the development of land parcels, as people who will work/live alongside the expressway are expected to generate toll revenue.
*Management indicates toll structure of Rs 1.80 per km translating into average revenue per vehicle at Rs 297. Future toll rates will be linked to WPI.
*The company has already made significant progress on its 165-km Yamuna Expressway.
*A key uncertainty for the project has recently been removed with a Supreme Court order upholding the UP Government’s land acquisition policy.
*Presently under section 80-IA, the profits of the company from infrastructure development are tax deductible for a period of 10 years. Thus, the company will be paying MAT rate of 18% as opposed to the statutory tax rate.
Township Project:
*As per the terms of agreement, the company has also been given the rights to develop 6,175 acres of land, adjoining the expressway, consisting of 5 equal land parcels of 1,235 acres each.
*One of the land parcels is located in Noida, two of them in district Gautam Budh Nagar (part of NCR), one in the district of Aligarh and one in Agra.
*The total developable area stands at 530 m sq ft and Jaypee Infratech has managed to sell roughly 21.3 m sq ft over the last two years.
*Roughly half of the land acquired will be used for residential projects, one third for commercial projects and the balance for institutional use.
*The average cost for all the land parcels works out to be Rs 105 per sq ft. Further, all these real estate projects are likely to be financed by internal accruals and pre-sales reducing dependence on external financing.
*Approximately 55% of the land obtained via the concession agreement is located in the NCR region which is perceived to be a desirable location for real estate development.
*Two of the land parcels are strategically located along the expressway (at the start or at the end of the expressway) which should attract significant buying interest.
*The roadway in turn could spur real estate activity.
*Given the low cost of land allotted for real estate purposes, Jaypee Infratech has the leeway to price its real estate developments aggressively.
*The company sold 21 million sq. ft. in the NCR region in FY-10, stated to be the highest volume sold in NCR by a player in a single year. Data for FY-11 to be added.
*For the June quarter, the company’s revenue, mostly from selling plots, was Rs 597 crore and net profit at Rs 395 crore; almost matching the full’s year’s numbers for FY-10. Data for Sep Quarter to be added.
*The company’s gearing at 1.98 times (June quarter), though not comfortable, may decline once the road is operational. Until then, cash flows from real estate can be expected to provide support.
Reasons not to invest:
Locational disadvantage for intermediate parcels may delay monetization of projects.
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