Jaypee Infratech,a fully-owned subsidiary of Jaiprakash Associates (JAL),is tapping the capital market with its initial public offer (IPO) of 6 crore equity shares. The company plans to raise Rs 1,650 crore via fresh issuance of these shares. CARE and ICRA have assigned the IPO Grade 3,which indicates average fundamentals. The issue is open for subscription from on April 29 to May 4. Objectives of the issue The issue comprises of a fresh issue and an offer for sale. The proceeds of the fresh issue will be utilised to partially finance the Yamuna Expressway Project and the rest will be used for other corporate purposes. Company profile Jaypee Infratech is an infrastructure development company engaged in the development of the 165-kilometre Yamuna Expressway (YE) connecting Greater Noida and Agra. The project is scheduled to be completed by 2011. Besides this,the company is also engaged in the development of five integrated cities. The company,which is part of Jaypee Group,was incorporated three year ago in April,2007,as a special purpose vehicle to implement the concessions. It holds the concessions from the Yamuna Expressway Industrial Development Authority (YEA) to develop,operate and maintain YE in Uttar Pradesh. The concessions also provide the right to develop 25 million square metres (nearly 6,175 acres) of land along the YE at five locations for residential,commercial,amusement,industrial and institutional purposes. The companys business model consists of earning from toll fee charged from traffic and related facilities on the expressway during the 36-year concession period and the development of associated real estate. Industry overview The Indian economys fast growth in recent years has placed increasing stress on physical infrastructure,namely,power,railways,roads,ports,airports,and irrigation. These verticals already suffer from substantial deficit in terms of capacity and efficiency in delivery. The infrastructure spending targets for the Eleventh Five Year Plan were revised from 4.6 per cent to 7.5 per cent of GDP,representing an increase of over 140 per cent compared with the Tenth Five Year Plan. Moreover,by reducing the level of provision against substandard loans to the sector from 20 per cent to 15 per cent in the current credit policy,the central bank has encouraged the flow of funds to the infrastructure sector. Additionally,the decision of the apex bank in the policy to treat annuities and toll collection rights under build-operate-transfer (BOT) road and highway projects as tangible securities has also come as a major relief to infrastructure companies. Commenting on the outlook of the infrastructure sector,Kishor Ostwal,chairman and managing director,CNI Research says,The long-term outlook of the sector is quite positive. With the expectation of inflows to emerging markets,especially India,due to the problems prevailing in Europe and the huge amount of planned capital expenditure investments here,Indias infrastructure growth story remains intact. However,one needs to remember that infrastructure projects have long gestation period and some times things do not work out the way they were originally envisaged. Concerns The companys primary business is the development of the Yamuna Expressway Project. Following the concession period,which will expire 36 years after the completion of the project,YE will be transferred to YEA (the Authority) and the company will not earn toll revenues from the expressway. Moreover,if the construction of the expressway is not completed by April 2013 or within the extended period,as may be approved by the YEA,the concession period could be shorter than 36 years. In such a case,the aggregate toll revenues of the company may suffer a corresponding reduction. The company has made a geographically concentrated bet because the expressway under development is located entirely in the state of Uttar Pradesh between Noida and Agra. The business,therefore,depends significantly on the economic conditions,activities in this region and revision of any government policy related to infrastructure development. Valuations and peer comparison Considering the price to earning (P/E) valuations,the company is trading at a pre-issue P/E of 23.5x on the lower side of the band and 27x on the higher side of the band of its annualised FY10 earnings of Rs 4.34. The return on net worth stood at nearly 21 per cent in FY09 as compared to a negative figure in the previous year (see table). The debt to equity ratio,a measure of companys financial leverage,rose by nearly a percentage point from FY08 to FY09. However,the ratio increased to 2.8,up by 100 basis points in the first three quarters of FY10 compared with FY09. According to Jagannadham Thunuguntla,equity head SMC Capitals: The company may or may not be exactly comparable to any listed entity because in the initial periods of infrastructure projects,a company does not realise major profit. However,it can be bracketed along with companies such as GMR Infrastructure,GVK Power and Infrastructure,DLF and Unitech,which are both in the infrastructure and real estate space. Should you buy? Of late,most IPOs have seen a muted response from retail investors. Commenting on this issue,Thunuguntla says: Right now the momentum in the primary market is good and Jaypee,being a well known group,may sail through. However,there is an element of execution risk and long gestation period which needs to be factored in before investing. He believes the issue is slightly expensive and only investors who have an investment horizon of medium to long-term,should invest in it provided they have factored in all the risks involved in the story. On the other hand,Ostwal suggests that: Investors should avoid this IPO at this point of time as the issue is expensively priced and the company is burdened with debt. niti.kiran@expressindia.com