JP Associates must sell assets for stock to escape bear grip

Jaiprakash Associates Ltd’s grand projects are providing little cheer to shareholders. Even as the company launched the Formula One race track in Uttar Pradesh last year, its stock trailed the broader markets.

The problem is familiar: Like other firms in infrastructure, Jaiprakash (JP) is heavily reliant on debt to fund growth, but earnings aren’t growing fast enough.

The opening of the Yamuna expressway will bring in much-required new cash inflows. The project is expected to generate substantial toll revenues in coming quarters and could well be a sentimental boost for the stock.

Don’t forget though that Jaiprakash Associates has to repay foreign currency convertible bonds worth $550 million by September.

That could offset the positive impact of the new revenue stream on overall earnings for a couple of quarters.

Last fiscal, long-term borrowings increased 12% to Rs 43,912 crore. Total liabilities spiked 21% to Rs 64,459 crore on higher provisions and a 77% spurt in trade payables. At the same time, cash and cash equivalents more than halved to Rs 2,860 crore.

Also See | Dull show (PDF)

The reliance on borrowings is hurting the firm’s profitability. Although income from operations grew by a robust 30%, net profits slumped 54% to Rs 947 crore as a sharp rise in interest costs crimped earnings. Finance costs in 2011-12 jumped 58% to Rs 3,134 crore.

Even that revenue growth is petering out given the prevailing economic conditions. Last quarter, its cement business clocked a mere 7.5% growth in revenue. Construction and real estate businesses have reported a 0.6-5.8% drop in revenues. These three businesses contributed almost three-fourths of company’s revenue in 2011-12.

To ease the financial pressure, the company is looking to sell stake in its cement assets. It has demerged its cement operations in Andhra Pradesh and Gujarat to this end. According to Angel Broking Ltd, the company is planning to raise around Rs 6,000 crore through stake sales. The earlier it finds a buyer, the better it will be for shareholders, as the new funds can be used to reduce debt.

But, like in the case of DLF Ltd, obtaining a favourable valuation will be a challenge in the current environment and could prolong the sale process.

PDF by Prajakta Patil/Mint.