 "Will asset sale help Jaypee tide over its debt woes?")
What added grist to the rumour mill was the series of asset sales done by the group over the past two years. In March 2012, it sold its entire shareholding of 74 per cent in Bokaro Jaypee Cement to Dalmia Cement (Bharat) for Rs 689 crore. More than a year later, in September 2013, it signed an agreement to sell its Gujarat cement plant to UltraTech for an enterprise value of Rs 3,800 crore. Over the next six months, Jaiprakash Power Ventures agreed to divest the BASPA II and Karcham Wangtoo hydropower projects in Himachal Pradesh to Abu Dhabi-based TAQA for Rs 9,689 crore.
The Jaypee group is not the only one to sell assets in order to pare its debt - others like Videocon, Bharti Airtel and Reliance Communications have done it before. Also, it is not the only infrastructure player to have been affected by the prolonged economic slowdown. Many others such as GMR, GVK and Lanco are struggling with a debt pileup. But the question being asked is: what is the group's core business? Is it engineering and construction (the business was started by Jaiprakash Gaur, who studied civil engineering at the Indian Institute of Technology Roorkee), or is it real estate? Where do cement and power fit in? What about hospitality?
The hospitality foray dates back to the early 1980s when New Delhi was preparing to host the Ninth Asian Games. The group built two hotels in the city within one year of each other: the Siddharth in west Delhi and Vasant Continental in south Delhi. This marked the group's first direct interface with consumers. Till then, the Jaypee group was known in the industry as a contractor that took up turnkey construction projects in the irrigation and power sectors. A third hotel in Mussoorie and a golf course at Greater Noida followed. But Hospitality never became big for the group: even now, it constitutes just about 2 per cent of its annual net income. But it did give the group the confidence to get into consumer-centric business of real estate: it undertook large residential projects in Greater Noida and Noida (it got substantial land parcels in lieu of building the Yamuna Expressway that connects Greater Noida with Agra). In between, it forayed into power and cement as well. At that time, some had even started to call the Jaypee group Larsen & Toubro of the North.
A finger in every pie
After several diversifications and high-cost projects like the Yamuna Expressway and Buddh International Circuit (where the Indian edition of the Formula-1 Grand Prix is held), construction and engineering, along with cement, continue to bring in almost three-fourths, the largest chunk, of revenue to the group. The strategy, Jaypee group insiders say, is to lighten the portfolio and use the proceeds to reduce debt, but exiting any of these businesses completely is not really on the cards. The fact that even after disinvestment, the group's cement capacity stands at about 32 million tonne per annum and that some 1700 mw will be added in power generation capacity over the next few months are proof that the group will continue to stay invested in the two businesses.
Despite the sale of assets, Jaiprakash Associates' standalone debt was at Rs 28,164 crore on March 31, 2014. Its interest cost almost doubled to Rs 6,094 crore for 2013-14 from Rs 3,134 crore a year earlier. Last month, the group informed investors that it had broken loan agreements. "The principal amount due under which our company is not in compliance with all covenants and ratios is Rs 10,079 crore. This is 35.77 per cent of our total principal amount of standalone debt of Rs 28,164 crore as of March 31," the company said in its filing with the stock exchanges. However, it added that it was regular in repayment across all its obligations.
According to the group, it raised Rs 15,869 crore through the power and cement disinvestments and the sale of some land parcels. These deals helped it reduce debt by about Rs 8,030 crore. Analysts feel more disinvestment could happen. "The commitment to reduce debt is a positive but the main issue of cash flow remains and depends on the completion of existing projects, especially in real estate," says KK Mittal, head, portfolio management service, Globe Capital. Going forward, the group may exit the real estate business because it has been a major bottleneck in its growth, says Mittal.
Asset sale is not the only way the group plans to raise money and reduce debt. Jaiprakash Associates earlier this month closed a qualified institutional placement (QIP) of 213 million shares of Rs 2 each at an issue price of Rs 70.27. According to the company, the net proceeds of Rs 1,477 crore will be utilised to repay or prepay certain loans, besides making investments in subsidiaries and joint ventures of the company, primarily in cement and fertilisers; and for general corporate purposes including working capital requirements. Prior to the QIP, as of March 31, 2014, the promoters and promoter group held approximately 45.08 per cent of the issued and outstanding equity shares of the company.
A company executive says that along with these steps to spruce up the balance sheet, the group is looking at the prospects for economic revival to boost its finances. "If the new government is able to revive the economy and create demand, things will improve. We have been able to control debt and have some funds," he says. On the operational side, the group recorded a net loss of Rs 703 crore in 2013-14 as against a profit of Rs 777 crore in 2012-13. According to an Emkay research report, low core profitability led to some 11 per cent increase in the standalone debt of Jaiprakash Associates. "With interest coverage slipping, further asset sale has become critical for de-leveraging," says the report.
What remains intriguing, however, is the group's foray into unrelated segments despite the pressure on its balance sheet. In June 2010, for instance, it bought 50 per cent stake in the Kanpur unit of Duncans Agro-Industries through its subsidiary, Jaypee Fertilisers & Industries. The plant was under a revival scheme then. By 2012, the revival was complete and the famous Chand Chhaap urea was back into the market.
Also, while it was divesting its stake in Bokaro Jaypee Cement, the group acquired 75-year-old Andhra Cement with a capacity of 3 million tonnes per annum. This was also the time when it firmed up plans to venture into the semiconductor business. In 2013, the government approved the group's Rs 26,300-crore SEM project with IBM and Tower Jazz.
Analysts consider this branching out into unrelated businesses as being completely out of focus. "The company needs to consolidate, reinvent, identify focus areas, strengthen its engineering and construction business, and then make long-term plans," says Mittal. While this may mean more asset sales by the group, it will necessitate a much more focused approach in dealing with its business portfolio.