Jaypee plans `18,000 crore initial investment in microchip facility
Factory will be set up in either Uttar Pradesh or Madhya Pradesh; Jaypee to hold majority stake in new business
New Delhi: Jaypee Group will proceed with its ambitious microchip fabrication facility in partnership with International Business Machines Corp., betting that a new government at the centre will boost infrastructure development, the lack of which has discouraged semiconductor makers from setting up plants in Asia’s third-largest economy.
Noida-based Jaypee, whose business interests include real estate, power and cement, will invest ₹ 18,000 crore through group company Jaiprakash Associates Ltd in the first phase and is targeting the Indian electronics market with annual imports of $20 billion.
Jaypee Group will decide between Uttar Pradesh and Madhya Pradesh for setting up the factory and will hold a majority stake in the new business.
“I want to make something which has not been made in India so far, which is microchips,” executive chairman Manoj Gaur said in an interview on Friday. Jaypee is likely to rely on internal accruals and loan from banks to fund the project.
Questions emailed to IBM on Saturday remained unanswered.
In September, the government had approved setting up of two semiconductor wafer fabrication facilities in the country. The other consortium is led by Hindustan Semiconductor Manufacturing Corp. along with Europe’s ST Microelectronics and Malaysia’s Silterra. These facilities are expected to directly employ as many as 22,000 people and indirectly around 100,000.
Jaypee, which is selling assets to pare its enormous debt, is betting that its semiconductor project will cater to growing demand from companies that are making electronic devices in India. So far, such companies have relied on imported microchips to power devices such as phones, computers and tablets.
Setting up a microchip plant can be a risky venture, according to Sanchit Vir Gogia, chief analyst and chief executive of Greyhound Research, an IT and Telecom research and advisory firm.
“Microchip business has been a very risky business. A lot of people got into it and then pulled out of it. Their manufacturing strategy will really decide their margins. We will have to wait and see what their strategy is,” said Gogia. “I am not very worried about the debt levels as this one will be a separate entity altogether.”
Jaypee group’s debt has ballooned as it borrowed money to expand its cement, power and property businesses even as the economy slowed. High interest rates and a slowing economy depressed demand for homes, power and cement, leaving the group struggling to repay its debt.
India’s economy grew slower than 5% for the seventh consecutive quarter in the three months ended 31 December.
“With all respect to the prime minister and finance minister, who are among the finest economists. I feel very sad that despite them being a part of this government, the country suffered such a slump. Whatever happened to the economy, reasons I don’t know, but this government disappointed people at large,” Gaur said.
Gaur said that people have voted in large numbers in the national elections to change the government, alluding that the Narendra Modi-led Bharatiya Janata Party will form the next government. “The next government will run for five years. You be sure about that. This voting has happened because of that,” said Gaur.
Meanwhile, Jaypee Group plans to use the proceeds from the sale of its assets to reduce its debt of ₹ 60,000 crore. It will try to pare this down to ₹ 35,000 crore by the end of 2014-15. The company sold assets worth ₹ 15,000 crore in the last fiscal year.
“We have made an investment of ₹ 60,000 crore between 2006-2012 in these three areas but in the last three years, analysts and people feel that there is too much leveraging and too much investment the company has made,” Gaur said. “Our problem was that we invested in power and cement, but demand fell down. We were bullish on this market.”
The group’s debt also increased because of its entry into motor sports. It organized India’s first Formula 1 race in October 2011, but failed to continue it beyond three seasons.
Gaur is, however, hopeful to get the race back to India in two years. “We are 100% confident of getting it back,” said Gaur. “I would like to say that Formula One was more about prestige… When you do certain things for the first time, prestige comes but mind does not come that time.”
The group has also decided to have majority equity participation in all its new businesses to avoid another debt trap.
“We have learnt some lessons. When we were expanding in cement and power, our equity was in the range of 35-45%, and from now on, our equity participation in our new businesses will be higher,” Gaur said.
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