Is the worst over for Jaiprakash Associates Ltd? The market seems to think so. Over the past three months, shares of the company have rallied more than 55% and have hit a year’s high of Rs.106 apiece. The benchmark BSE-100 index has risen 11% in the same period. On Tuesday, at 10.00am, the shares were trading at Rs.103.15 apiece.
Two factors are driving gains in the stock. One is the impending sale of its Gujarat cement plant. Jaiprakash Associates has confirmed to the stock exchanges that its subsidiary Jaypee Cement Corp. Ltd, which controls the Gujarat cement plant, is considering “various options” to unlock value. One option is to sell the unit for cash consideration. Business Standard reported on 8 December that the company is in talks with the Aditya Birla Group to sell the cement unit for Rs.4,357 crore. An all-cash deal will help Jaiprakash Associates pare its debt of Rs.53,174 crore and conserve earnings. Interest costs usurped more than half of the company’s operating profits in the first half of the current fiscal.
The second factor is the expectation of a jump in operating cash flows from 2013-14. With the capital expenditure cycle at the company peaking, operating cash flows are expected to improve from April 2013. Brokerage First Global Stockbroking Pvt. Ltd said in a note: “Given the absence of any major capex plan for FY14 and increase in profitability, the company is likely to record a positive free cash flow for FY14 for the first time in the last 10 years, which will allow it to comfortably meet most of its expected interest liability for the year.”
Overall, Jaiprakash Associates seems at the cusp of a financial revival. The company has recently received environmental clearance for the Amelia coal block. According to Edelweiss Securities Ltd, the management expects the mine to be operational by January 2013.
With most projects nearing completion, analysts expect the company’s revenue to get a fillip from the next fiscal year. While that will improve the company’s cash flows, the management has to conserve earnings by monetizing assets and reducing debt for the stock to continue its outperformance.