Post the announcement by Jaiprakash Assoc-iates that it is raising $200 million through foreign currency convertible bonds (or FCCBs), the company’s share prices fell sharply by almost 10 per cent to close at Rs 63.70 on Wednesday. The company has been in the limelight due to the high debt in its books and due to liquidity issues. This is also a reason that the fresh issue of FCCBs to redeem the existing ones (maturity in September 2012) did not go down well with the market.
In addition to higher interest rate of 5.75 per cent per annum (compared to almost nil for existing FCCBs) the Street is also surprised at the likely equity dilution of about five per cent the move will result in. “The share prices tanked because as guided by the management earlier, the market was under the impression that the company will be able to meet its FCCB obligations from internal accruals and resources but that is not the case after the announcement of fresh issue of FCCBs,” says SP Tulsian of sptulsian.com.
The company will use the proceeds from the fresh FCCB issue to part-finance its FCCB redemption of $355 million or about Rs 2,000 crore due on September 12, 2012. While this move helps resolve its near-term obligations, analysts are worried about how the company is going to meet the remaining amount of FCCB redemption and mounting debt in the books.
| INTEREST COSTS WOES | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Sales | 12,853 | 14,199 | 16,116 |
| Ebitda (%) | 26.8 | 24.7 | 24.3 |
| Interest costs | 1,782 | 1,887 | 1,809 |
| Adjusted PAT | 1,020 | 797 | 1,029 |
| EPS (Rs ) | 4.8 | 3.7 | 4.8 |
| Return on equity (%) | 10.4 | 8.1 | 10.3 |
| PE (x) | 13.3 | 17.3 | 13.3 |
| E: Estimates Source: Motilal Oswal Securities | |||
Apart from the news about the fresh issue of FCCBs, foreign research house Goldman Sachs, also released a ‘Sell’ report titled ‘Annual report analysis — leverage issues deepen’ on the company on Wednesday with a 12-month share price target of Rs 57 a share. In this backdrop, the stock is expected to underperform going forward, at least till there is a strong pick up in the cement business or the debt issue eases significantly (a positive trigger could be if the company is able to sell a part/or a stake in its huge cement business), feel analysts.
The company is estimated to have a consolidated debt of Rs 50,300 crore for financial year ended March 31, 2012, which is 34 per cent higher as compared to Rs 37,500 crore a year ago. The increase in debt has also led to the company’s debt-equity ratio to rise to 4.4 times, raising concerns among investors and analysts about the low interest cover. “High debt levels would result in interest coverage remaining close to 1.5 times over the FY12-15E despite Ebit (earnings before interest and tax) doubling over the same period,” says Ishan Sethi, analyst, Goldman Sachs in his report on the company.
Including the redemption due in September, Sethi estimates the current long-term debt maturities in the region of Rs 7,800 crore. To deal with the situation the company needs even more funds. “Given the company’s high indebtedness, a stake sale in its cement business remains a key to debt reduction, in our view, which is what we believe that the market is focused on,” says Morgan Stanley analysts Akshay Soni and Aarti P Shah in their report dated August 29. The analysts are eying cement deals particularly because that could fetch a reasonable amount.
According to estimates, the cement business is valued at about Rs 4,200 crore or an enterprise value (EV) per tonne of $160. The international building materials group, CRH, has already announced that it is negotiating with Jaypee Cement Corporation of JP Associates for a stake in its cement business. There will still be some more debt obligations which analysts believe would be repaid from the domestic debt and internal accruals. If these materialise, it can lead to an 8-10 per cent uptick in the EPS over the next two years, which is why analysts believe that the resolution on this front can lead to a stock rerating.
Additionally, it is also believed that a possible interest rate cut could give some relief to the company. According to Morgan Stanley’s analysts, every 50 basis points reduction in interest rates could lead to about eight per cent uptick in the company’s earnings.
Though these things could lead to a re-rating of the stock, most analysts remain cautious in the near-term, considering that the issue of high debt in the books still remains and prefer to monitor the successful monetisation of the company’s non-core assets, and its ability to raise additional funds and their actual impact on the earnings in the coming months.
