F1 Builder With $10 Billion Debt to Sell Assets: Corporate India

Jaypee Group, owner of India’s most indebted cement maker, plans to sell some of its plants and real estate in a bid to cut liabilities by about 25 percent.

The builder of India’s only Formula One racing track seeks to reduce debt by 150 billion rupees ($2.5 billion) by selling its cement plants in southern and western India, some of its power generation units and property in a year, Suren Jain, managing director at Jaiprakash Power Ventures Ltd. said in an interview. The flagship Jaiprakash Associates Ltd. has $10 billion of total debt, according to data compiled by Bloomberg.

The group’s liabilities increased fivefold in five years as Chairman Manoj Gaur took on debt to expand the cement maker’s power, sports and construction businesses. Gaur is selling assets to cut costs and revive profit, which has fallen for two straight years, as a central bank engineered cash crunch prompts lenders to raise interest rates for the first time in two years.

“The cash flows from operations won’t be sufficient in the next one to two years to bring down the debt,” said Anubhav Gupta, an analyst at Kim Eng Securities Pvt. in Mumbai. If the company had sold a cement plant “12 months back the troubles might not have been what they are today.”

Jaiprakash Associates had a net debt of about 612 billion rupees, the highest among Asian makers of the construction material after China National Building Material Co., according to data compiled by Bloomberg.

Worst Performing

The Indian company will need 81 billion rupees to service its debt in the year ending March 31, Ankur Kulshrestha, an analyst with HDFC Securities Ltd., said in a note to clients on July 30.

Jaiprakash Associates’ shares have dropped 68 percent this year, making them the worst performing stock in the CNX Nifty index. They surged 4.5 percent to 32.85 rupees in Mumbai today, the highest since July 31.

The company’s convertible bonds yield 14 percent, said Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets Ltd. An index tracking eight Indian convertible debt had an average yield of 4.66 percent on Aug. 9, according to Barclays Plc.

“The higher yield shows that the investors want a higher return for the comparatively higher risk for the name,” Dharnidharka said.

The group plans to sell about 30 percent of its cement capacity of 35 million metric tons, Jain said without elaborating. Gaur is looking to cut debt at Jaiprakash Associates and its two subsidiaries Jaiprakash Power Ventures and Jaypee Infratech Ltd., he said.

Enterprise Value

Billionaire Kumar Mangalam Birla is in talks to acquire the Gujarat cement unit of Jaiprakash Associates, three people with direct knowledge of the matter said in November. Talks with Birla were revived after it terminated talks with CRH Plc in October. Jaiprakash Associates has a 4.8 million ton capacity in Gujarat and a 5 million ton capacity in South India.

The company may sell the factories for about $120 a ton of enterprise value, calculated as a sum of market capitalization, debt and minority interest minus cash, lower than the asset’s replacement cost, Ashutosh Narkar, an analyst with HSBC Holdings Plc in Mumbai wrote in a report to clients on Aug. 2.

Jaiprakash Power is in talks to sell some of its hydro power plants, two people with knowledge of the matter said, asking not to be identified as the information is private. Jaiprakash Power generates 1,300 megawatt from hydel plants and has 500 megawatts of thermal capacity.

Jain declined to identify assets the company plans to sell.

The company plans to start generating power from a 1,320 megawatt thermal power plant this year and refinance loans for the unit, which will be “cheaper as the projects would have started operations,” Jain said.

Hockey Team

The group also plans to sell about 200 acres of land owned by Jaypee Infratech for around 10 billion rupees, Jain said. It sold 300 acres of land for around 15.5 billion rupees, he said. It is also targeting home sales of around 10 billion rupees each quarter this financial year.

Founder Chairman Jaiprakash Gaur, who started as a civil contractor, expanded into hotels in 1981 and started producing cement five years later. In the past five years, Jaiprakash Associates added 15 subsidiaries from air transport services and a company to process soya and mustard to managing a hockey team, according to the company’s annual report.

The company has also developed a 5.13-kilometer (3.19-mile) Formula One track called the Buddh International Race Circuit, built on the outskirts of India’s capital, New Delhi. The inaugural race was held in 2011.

Formula One Chief Executive Officer Bernie Ecclestone told the Indo-Asian News Service the race will be dropped from the 2014 calendar and return in early 2015.

‘Retain Faith’

“We retain our faith in the asset portfolio quality,” HDFC’s Kulshrestha wrote in the report. “But remain cautious given the tough macro environment. The company will not be able to meet its funding requirements through operations alone.”

Money managers including Birla Sun Life Asset Management Ltd. and Sundaram Mutual Fund have cut their holdings in the company, data show.

“We are avoiding companies with high debt,” said Jaya Rao Venkatesan, a Chennai-based fund manager at Sundaram Mutual. “The interest-rate reduction cycle, which we thought will happen this year, will get delayed. To that extent such companies will be hard pressed,” particularly during an economic slowdown, he said.

Economy Slows

India’s industrial production in June fell for a second straight month, while the central bank cut its forecast for Asia’s third-largest economy to 5.5 percent from 5.7 percent.

The Reserve Bank of India raised two rates on July 15 and has capped cash injections into the banking system and tightened lenders’ reserve ratios to curb the supply of rupees in a bid to reverse a slide in the currency. The measures triggered an unprecedented 223 basis points jump in the three-month interbank rate in July to 10.75.

“Today our leverage looks high because the economy is not doing well,” Jain said.

Jaiprakash Associates’ profit fell 27 percent to 4.6 billion rupees in the year ended March 31 after a 65 percent drop a year earlier. Interest expense climbed 56 percent to a record 43.4 billion rupees, data show.

For Jaiprakash Associates asset sales “are no longer just a desirable outcome but a necessity,” said HSBC’s Narkar. “However, in the current market scenario, potential buyers will like to squeeze JPA on valuations making it difficult to sell off.”