Jaypee shares crash on low asset-sale valuation

Global brokerage JPMorgan downgrades JP Power stock to 'neutral' from 'overweight'

The stock prices of two Jaypee Group companies — JP Power and JP Associates — tumbled on Monday on investor concerns that the group had hived off its two hydro-electric power plants at lower valuations. According to participants, the deal size, valued at around Rs 10,000 crore, was 30 per cent lower than the initial estimates.

JP Power shares crashed 15.5 per cent on Monday to close at Rs 14 apiece. JP Associates declined by 3.5 per cent to Rs 40.45 a share. During the day, JP Power was down as much as 17 per cent while JP Associates fell 4.6 per cent.

Analysts viewed the development as being negative for the group, which is reeling under a debt of close to Rs 60,000 crore. While the sale is expected to help the company’s asset monetisation plans, the disappointing size of the deal renders the risk-return trade off unattractive, said analysts.

Foreign brokerage JPMorgan in a report released on Monday downgraded the JP Power stock to ‘neutral’ from ‘overweight’ and brought down the target price to Rs 19 from Rs 25.

The debt-ridden group on Friday announced its plans to sell two of JP Power Ventures Himachal Pradesh-based hydroelectric plants – Baspa and Karcham Wangtoo (KW) to a consortium led by Abu Dhabi-based TAQA India Power Ventures. The announcement made on Friday pushed up JP Power and JP Associates shares by 12 and five per cent, respectively.

Goldman Sachs maintained its ‘neutral’ outlook but raised questions about the impact of the company’s future growth. “Based on our estimates, Baspa and KW, which are both operational assets, would have contributed almost 14 per cent to JP Associates’ (JPA) consolidated FY15E Ebitda (earnings before interest, taxes, depreciation, and amortisation), whereas the asset sale would reduce JPA’s consolidated debt by only 9.5 per cent,” said analyst Pulkit Patni and Mohit Soni in a note to clients by Goldman Sachs.

The outlook for both JP Power and JP Associates has been negative for the past few quarters due to the poor pick-up of the investment cycle in the economy. Infrastructure sector companies suffered and power companies were among the worst impacted. Low tariffs and a poor distribution system are among the many problems faced by the power sector.

The stock movement for both these stocks has been very volatile in the past one-year period. The two stocks have been on a decline since the beginning of the year. JP Associates has fallen by over 23 per cent, while JP Power is down 12 per cent. Analysts said the volatility and the negative outlook had made the two stocks a favourite among traders.

“What has been happening is that people buy these stocks on rumours or on good news. Then after the news is done, they sell the stocks and book profits. This shows the inherent weakness in the stock,” said Sonam H Udasi, head of research of IDBI Capital.

He added that investors were not taking huge bets on stocks like the two JP group companies, which are over-leveraged.

This corresponds with the number of short positions being built by investors in the two stocks.

“Core-asset sales are never taken well by the market. The news on Friday has added to the negativity and pushed up the number of short-positions in the stock,” said Ashish Chaturmohta, head of technical and derivative analysis at Fortune Equity Broking.

Technical analysts said the pain is far from over for the stocks, which could see an additional decline of five to six per cent.