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Home / Companies / Jaiprakash Associates’ status rated default, fails to pay off debt

New Delhi: On Friday, rating firm Credit Analysis and Research Ltd, or CARE, downgraded debt-laden Jaypee Group-controlled Jaiprakash Associates Ltd’s total bank loans and long-term non-convertible debentures (NCDs) to D, or default status, making it a pariah in the banking world. Reason: the company has not paid its dues on debt.

This should not come as a shock to anyone. The group has had massive levels of debt; its consolidated debt was . 95,272.03 crore at the end of the year to March, per Mint research. A lot of that money had been borrowed over the years to fund a wide range of expansion dreams, as Mint reported earlier this month in what turned out to be a timely story, and the first in a four-part series on how Indian companies have built their castles on a pile of debt. (http://www.livemint.com/Companies/zKDlLjtKiKrlDrCg9r1hFL/Jaypee-Groups-Rs61285-crore-debt-problem.html ).

Credit Suisse raised the alarm as far back as 2012 in a report titled House of Debt, which listed the top 10 most indebted corporate houses in India. Jaypee made it to that list and the one that the brokerage followed up with the next year. Of that list of 10, four have defaulted in the past year on some projects or bond payments, Credit Suisse pointed out in a note in April.

The group, founded by Jaiprakash Gaur, witnessed a phenomenal rise between 2000 and 2006, and rode the wave of the realty and infrastructure boom periods. Revenue went up—at a compound annual growth rate of 26.9% at Jaypee Power Ventures Ltd and 32.08% at the group’s engineering and construction company JP Associates Ltd, between 1999-2000 and 2014-15. But then, so did debt. At 40 times and 20 times, respectively.

And that’s the problem. In a period of easy money, Jaypee, and many other Indian conglomerates, attracted by the promise of easy pickings went berserk in terms of expansion, including in new sectors that didn’t make sense even then, let alone on hindsight, as those were so far removed from what these companies were good at doing.

A perfect example: Formula One racing which the group brought to India, driven by the belief that the race would drive traffic to its various residential and commercial projects on the Noida Expressway and in Greater Noida.

The question now is if this is the start of the downfall of these old conglomerates that rode the easy loan wave of the early 2000s, aided by political patronage? Laid low by the economic downturn over the past few years which led to a number of ambitious projects being stillborn —and changes in the political dispensation—do they have anywhere to go but down?

In its defense Jaypee, and others that Mint reporters have spoken to on this topic, says it is selling assets to pare debt. (To be sure, Jaypee has said that it expects to shave off Rs.24,441 crore of debt through asset sales by September.) But the critical element about asset sales is that buyers only want the good stuff. What happens to the lemons—and there will be plenty of them—once the cherries have been picked? The conglomerates will still be stuck with those. And with none of the structural problems changing drastically—problems like access to coal and gas and land—that Jaypee and others have repeatedly blamed for their severe debt problems, their woes will likely continue.

The stock market has already shown Jaypee the way--from a peak market cap of about $15 billion back in 2007, it’s now at less than a billion. Friday’s action by CARE is a ratings downgrade. The question is whether the banks will act on it and declare these loans as non performing assets or not.

Maybe it’s just a matter of time.

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