 "Jaypee: Too fast, too soon")
The scrip has lost two-thirds of its value since June. At Thursday's closing price of Rs 27.75 a share on the BSE, the stock is just a whisker away from its 10-year low of Rs 19.50 in October 2004, adjusted for bonuses, stock splits and rights issues.
The shareholders have suffered despite the company being one of the fastest growing in the past decade. Jaiprakash Gaur, the founder, and later his son and current chairman and chief executive, transformed a family-owned construction firm into one of India's largest infrastructure companies. The Noida-based group is now among the top entities in cement, hydro and thermal power, construction, highways, real estate, hotels and sports.
It shows in the growth chart. In the past decade, the revenues are up nearly seven times, growing at a compound annual rate (CAGR) of 22.4 per cent. Operating profit is up 7.5 times during the period, at a CAGR of 23.7 per cent. Capital employed jumped nearly 15 times, at a CAGR of 33.8 per cent.
Why
Analysts attribute this to debt-financed growth and diversification. "Jaypee's mistake was to do capex aggressively and diversify into unrelated sectors despite obvious signs of an economic slowdown after the 2008 Lehman crisis. This made many of its assets economically unviable at the low rate of GDP growth," says G Chokkalingam, head of Equinomics Research & Advisory.
The company refused to answer an email questionnaire.
In the past decade, the consolidated debt has jumped 14 times, rising at a CAGR of 35 per cent since the year ended March 2004. As the net worth (or shareholders' equity) grew much slower at a CAGR of 25.6 per cent, it resulted in a sharp rise in the leverage ratio. The debt to equity ratio rose to seven at the end of FY14 from 3.5 in FY04, and to 7.7 if other long-term liabilities are taken into account.
This has led to a situation where the bulk of the incremental profits has been eaten by debt servicing, leaving little for shareholders. Jaypee's interest burden is up nearly 18 times in 10 years, at a CAGR of 33.5 per cent. Interest payments accounted for only 41 per cent of consolidated operating profits in FY04 and only a quarter in FY06. The ratio zoomed to 89 per cent in FY14 and the trend suggests it might soon cross 100 per cent, putting the future in jeopardy. Mounting interest payments resulted in Jaypee reporting its first loss (on a consolidated basis) in FY14.
The shareholders also had to suffer earnings erosion through constant equity dilution. In the past decade, Jaypee has repeatedly raised capital through foreign currency convertible bonds and qualified institutional placement of shares. This resulted in steady equity dilution, resulting in destruction in earnings per share as the number of those issued rose almost every year. In 10 years, the equity base has grown at a CAGR of 6.3 per cent (excluding a 1:2 bonus issue in December 2009). This shaved a third from the company's operating profit per share.
All hopes are now on asset selloffs to pre-pay debt and bring down leverage to a more manageable level. But as happens in every distress sale, good assets get sold first, leaving the seller with less lucrative ones. The company has already sold off a chunk of its cement business and is in talks to sell its hydro power assets. Cement is one of the most cash-rich businesses, attracting record valuations on the bourses. Hydro power, though a cash guzzler during the construction phase, generates a steady stream of cash once commissioned.
After divestment, the company would be left with cash guzzlers such as construction, real estate, hospitality and power, beside a much smaller cement division. The deleveraging could go on for years, forcing the company to forgo growth during the period. And, there is no guarantee that the process would be entirely successful, given its high leverage ratio, interest payments rising faster than revenues and operating profit, and the capital-intensive nature of most of its businesses.
At its current stock price, the market value is less than a tenth of its consolidated debt on the books, making it technically insolvent. Shareholders should pray for the best but prepare for the worst.