Roiled by debt, is it back to the roots for Jaypee Group?

Jaypee Group has sold its cash-generating assets to pare Rs75,000 crore in debt but EPC may hold key to its future

Manoj Gaur, executive chairman and chief executive of Jaypee Group. Photo: Pradeep Gaur/Mint

Jaypee Group traces its roots to a civil construction project it undertook in Mongrol, Rajasthan, in 1958. That laid the foundation for a long and successful record it went on to build in the engineering, procurement and construction (EPC) business in the subsequent years and decades.

As Jaypee struggles under the burden of Rs.75,000 crore of debt, as of March 2015, EPC may well hold the key to the future of the conglomerate led by Manoj Gaur.

EPC is a contract awarded in the engineering and construction industry. The contractor designs the project, procures the necessary equipment and materials to build it and delivers a finished asset to the client.

A revival looks difficult for Jaypee Group through its power, cement and highway units, unless there’s a dramatic change in the operating environment, said a senior investment banker who advised the Jaypee Group.

“The Jaypee Group has to go to its roots to survive,” he said on condition of anonymity.

The group based in Noida is thinking along similar lines and revived its focus on the EPC unit, said a person close to the group.

“Jaypee has a huge focus on the engineering and construction business. That was always the core for Jaypee. The group is revitalizing the EPC business to stage a revival. Jaypee Group may not be able to restore lost glory through the EPC vertical, but it can at least keep its head above the water,” said this person, requesting anonymity.

In the past two years, Jaypee Group, with interests in power, real estate, cement, highways, fertilizer, hospitality, healthcare and sports, has been pushed by creditors to sell some of its best assets, transfer ownership of land parcels and even hand over the keys to the group’s headquarters in Noida to pare debt.

The Jaypee Group has so far over Rs.26,000 crore of cement and power assets.

An email sent to a group spokesperson on Friday seeking comment on its strategy for its remaining businesses went unanswered.

In a statement issued on 31 March, the day the Jaypee Group sold 21.20 million tonnes in cement capacity to UltraTech Cement Ltd, Jaypee Group said it is “determined to leverage its expertise in the fields of engineering and construction, real estate and project execution, in a committed manner”.

At present, the group’s EPC division, housed under the flagship Jaiprakash Associates Ltd, is executing works worth Rs.37,256 crore, according to the firm’s annual report for 2014-15.

Of this, Rs.30,000 crore is the value of the 1,047km-long Ganga Expressway project, connecting Greater Noida and Balia in Uttar Pradesh, which has been indefinitely delayed.

Experts say the EPC business has potential to grow, but the group would need to strengthen its financial position to win projects coming up for bidding.

“EPC is re-emerging as a prominent business driver. The volume of activity is growing and the contract terms are more balanced now, thanks to the past experience. Many groups see EPC as a clear growth option. However, EPC entails considerable working capital needs. Companies that moved early to divest assets or shed loss-making projects are financially better placed to bid for upcoming EPC contracts,” said Kameswara Rao, leader (energy, utilities and mining) at PricewaterhouseCoopers, a consulting firm.

Jaypee Group has four projects under execution, including the Sardar Sarovar (Narmada) Project in Gujarat, 900 megawatts (MW) Baglihar Hydroelectric Projects in Jammu and Kashmir, Alimineti Madhav Reddy Project in Andhra Pradesh and 990 MW Punatsangchhu II Hydroelectric Project in Bhutan.

Asset sales

In September 2015, Jaiprakash Power Ventures Ltd sold two of its hydro assets for Rs.9,200 crore to JSW Energy Ltd. The company now operates three thermal power plants and one hydro power plant, most of which are facing fuel supply constraints or weak demand.

Jaiprakash Power also signed a memorandum of understanding with JSW Energy to sell its 500 MW Bina thermal power plant in September 2015 but is yet to announce a definitive deal.

The sale of these projects will help bring down debt of the power division by close to 30% but the division’s Ebit (earnings before interest and tax) would come down at a higher 59%, Credit Suisse said in its House of Debt report in October.

In the cement segment Jaiprakash Associates in March signed a definitive agreement to sell 21.20 million tonnes of cement assets to UltraTech for Rs.15,900 crore. After the deal, the group would be left with 10 million tonnes of cement capacity. That, too, may eventually be sold, said the second person cited above.

The sale of the cement units, while generating cash to pay debt, will also hit earnings. In fiscal year 2015, cement contributed 53.7% of Jaiprakash Associates’ revenue; the cement unit reported a profit before tax of Rs.237 crore. Overall, Jaiprakash Associates reported a loss of Rs.1,831.99 crore for the year.

Once the asset sales are completed, the Jaypee Group would be left with 2,880 MW in operational power capacity, the 160km Yamuna Expressway, land development rights for 25 million sq. metres, three realty projects, one hospital, five hotels, a sports division, one fertilizer plant and its EPC division.

The second person cited earlier in the story noted that since most of the group’s remaining assets are under stress, focussing on the EPC business is logical.

“Jaypee Group has already sold its best and cash-generating assets in the power and cement sectors. Whatever left is either damaged or yet to get raw material linkage,” said this person.

Fate of non-core ventures

As cash-generating assets dwindle, the fate of new but non-core business ventures that the group entered into also remains uncertain.

Before it hit a rough patch, Jaypee Group diversified into non-infrastructure businesses such as healthcare, hospitality and fertilizer.

Whether the group chooses to exit these businesses will depend on their ability to generate cash flows.

The hospitality business, for instance, is generating cash flows for the group, explained the second person cited above. “At present, the group is not contemplating sale of the hotels considering the cash flows,” this person said.

In contrast, the group’s plans in healthcare are a drain on the resources, and any plans to expand that business are at a standstill, said the second person. “Originally, Jaypee Group had ambitious plans for expanding its hospital chain. However, the group had put the plan on hold citing slowing economy and debt woes,” he said.

Jaypee Healthcare Ltd, a subsidiary of Jaypee Infratech Ltd at present runs a 504-bed hospital in Noida.

Real estate

Apart from reviving the EPC business, the group still has real estate to fall back on.

The company’s infrastructure subsidiary Jaypee Infratech Ltd holds various land parcels and the Yamuna Expressway project —a sale for which could help the firm access some cash flows. On 23 December, Mint reported that the company had come around to the idea of selling its entire holding in the expressway after an attempt to sell a partial stake failed.

“Jaypee Group has good highway assets considering the real estate attached with the highway projects. These can fetch a decent valuation with road sector deals being struck at a premium,” said a third person familiar with the company’s plans.

“However, the Jaypee Group may not able to address the debt problem entirely through the road assets, considering the size of debt,” this person added, requesting anonymity.

Jaypee Infratech has a right to develop 25 million sq.mt. of land along the expressway, according to its 2014-2015 annual report. Some parts of this land has already been transferred to the banks.

In addition to these land holdings, Jaiprakash Associates is also executing three large-scale real estate projects in Noida. This, however, may end up being more of a burden than a boon.

The Indian real estate sector has taken a hit due to the rising inventories and a slowdown in demand. According to Liases Foras Real Estate Rating and Research Pvt. Ltd, unsold stock across eight main cities will take 43 months to clear at the current sales rate.

As such, generating cash from real estate sales may be challenging for the group until the real estate sector sees a revival.

Source : http://www.livemint.com; UltraTech Cement Ltd