Tuesday, June 21, 2016

Asset sales help Jaypee to bring down debt
June 20, 2016: Some of India's top business houses were termed "House of Debt" last year as they went on a massive expansion and diversification spree fuelled mainly by debt. As the economy slowed down, some of these groups failed to repay loans and were forced by banks to sell assets. We look at how these groups performed during the fiscal ending March this year and whether they managed to save themselves or sunk deeper into crisis.

For the promoters of Jaypee group, the aggressive expansion during the last decade across the infrastructure vertical has come with a steep price. The Delhi-based group had to sell profitable assets to remain afloat even as banks, alarmed by its defaults, are pressurising the group to put more assets on the block.

A senior banker with Mumbai-based public sector lender said the intent of Jaypee group to reduce debt level is genuine as evident from the sale of operating key operating assets like power plants and cement business. "But still more has to be done to bring down debt level to sustainable level. For this, the group is looking to monetize or swap its real estate along the Delhi-Agra expressway. While it is a feasible, the valuation of such assets holds key for effective deal making, " the official said asking not to be quoted. Bankers also say when compared to other "house of debt" groups, Jaypee is sincere in bringing down its debt levels.

But that sincerity is due to a reason. During fiscal 2016 results statement, flagship Jaiprakash Associates revealed that it has defaulted to bank loans, interest and statutory payments of Rs.4,539 crore. The defaults were mainly due to a massive loss of Rs.3,200 crore on revenues of Rs.17,181 crore in the fiscal 2016 and analysts said it's the Rs.7,500 crore odd finance costs, or almost Rs 21 crore a day, which is draining company's funds. The stock markets also punished the group as the market value of the group declined 72 per cent as on March 2015 to Rs.1,670 crore as on June this year.
Photo: The Times of India
Analysts said the group wanted to grow too fast with diversification in real estate and infrastructure sector without worrying about any slowdown. Two of its marquee projects - the Delhi-Agra expressway and Formula 1 stadium turned out to be white elephants with zero visibility of earnings. To make matters worse, Axis Bank took over the group's headquarters in Delhi as the group failed to repay loans.
For bankers the biggest worry is that the company's revenues and profits are falling faster than the debt obligations despite recent asset sell-off. For example, in FY16 Jaypee consolidated revenue was down 14 per cent year-on-year while operating profit was down 32.4 per cent. In comparison, company's consolidated debt declined by only 5 per cent last fiscal while interest obligations were up 4 per cent in the same period. The result, Jaypee's net debt to equity on consolidated basis inched-up to 4.4 from 4.0 a year ago and its interest coverage ratio declined to 0.6, making it virtually impossible to service debt with its internal accruals.

Analysts are not surprised. "This is what happens in a fire sale. You are forced to sell the most liquid and cash-rich assets and you are left assets with few buyers. This is what is happening with Jaiprakash Associates pushing the company even deeper into a debt trap," says G Chokkalingam, founder & CEO Equinomics Research & Advisory.

Jaypee is forced to divest its cash cement and hydro-power assets and there are few takers for its cash guzzling real estate, infrastructure projects or hospitality projects. The salvation for Jaypee lies in a secular growth revival in economy lifting the demand and valuation of its struggling infrastructure, power, hospitality and real estate business, analysts said.

Future after asset sales
Analysts say Jaypee has taken multiple steps to improve its financial metrics. In February this year, Jaypee sold its cement unit with a capacity of 17.2 mtpa to Aditya Birla group's Ultratech at an enterprise value of Rs.15,900 crore. The deal is not closed yet. Its subsidiary, Jaiprakash Power sold its hydro power projects to JSW Energy for Rs.9,300 crore. In September last year, the company sold its Bina power project to JSW for Rs.3,500 crore. It had sold its 74 per cent stake in Bokaro Cement to Dalmia for Rs.668 crore in November 2014 and its cement grinding unit in Haryana to Shree Cement in April 2015 for Rs.358 crore. These asset sales will help the group to bring down debt significantly and an investor could see the improvement in its financials by this fiscal end, said a Mumbai analyst.

Post the cement sale, Jaypee will have 10.6 mtpa of cement capacity in Madhya Pradesh, Uttar Pradesh, Andhra Pradesh and Karnataka, a hotel division with five luxury hotels, real estate division with land around Yamuna Expressway. 

"We have time and again shown our will to take proactive steps to tide over these turbulent times caused by the economic slowdown," Jaypee Chairman Manoj Gaur said on April 1 this year soon after signing the deal with the Birlas. 

Jaypee had blamed worsening performance of core sectors and a shaky economy for the fall in financial metrics. But despite assets sales, it has a long road ahead to return to black.

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