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Manoj Gaur, executive chairman of the Jaypee Group, has sold a fifth of his group’s assets in the past year—all to pare debt. But the group still has consolidated debt of 61,285 crore.

With every asset that he sells, the business empire that he created with his father Jaiprakash Gaur—spanning infrastructure, real estate, power and cement—diminishes even as his competitors grow stronger with every Jaypee asset they buy.

Prior to first round of divestment that started in 2013-14, Jaypee boasted of assets worth 1 trillion. While the group’s 500 million sq.ft land bank around Delhi is intact, other assets have shrunk—it will be down to 12 cement plants from 19, one hydropower plant from three and three thermal power plants from five, in 2015.

The big question is what happens when all of Jaypee’s good assets are sold?

Manoj Gaur did not respond to multiple requests for an interview. A detailed questionnaire sent to the company remained unanswered. But his interview with Mint on 13 May 2014 helps shed light on his thinking.

A staunch believer in religion, Gaur said by the grace of god, he has been able to build a large empire, and could do so again.

“Our chairman (Jaiprakash Gaur) said that in tough times, only good things go," he said in the interview. “With this motto and clarity, we (decided) instead of thinking which project is good and which is not, we will deleverage even if it means selling good assets."

Back in the day

Between 2006 and 2012, the group invested 60,000 crore in real estate, power and cement. “But in the last three years, analysts and people feel that there is too much leveraging and too much investment," Manoj Gaur had said in the interview.

The group, founded by Jaiprakash Gaur, witnessed a phenomenal rise between 2000 and 2006, riding on the realty and infrastructure booms. Revenues of Jaypee Power Ventures Ltd and the group’s engineering and construction company JP Associates Ltd notched up compound annual growth rate (CAGR) of 26.92% and 32.08%, respectively, between 1999-2000 and 2014-15.

In the same period, debt had grown 40 times and 20 times, respectively.

Jaiprakash Gaur started his career as a civil engineer with the Uttar Pradesh government’s irrigation department. It was under his stewardship that Jaiprakash Associates Ltd built the Sardar Sarovar Dam over the Narmada river in Gujarat and the Tehri dam over the Bhagirathi river in Uttarakhand in 2006.

It was around this time that father and son sat down to chalk out a strategy for the group’s next phase of growth. Their aspirations were soaring, businesses were expanding, and banks were putting money into whatever the Gaurs wanted.

It was then that they decided to bid to bring Formula One racing to India. The idea was to create an event on a scale that India had never seen before, and Jaypee wanted to expand its already thriving business around it. The group won the bid to hold the races in India for five years starting from 2011.

The so-called golden triangle of Delhi-Agra-Jaipur was pivotal to their game plan, said a person who was directly involved in the planning and execution of the event. He declined to be named.

Jaypee’s ambitions got a further boost when then Uttar Pradesh chief minister Rajnath Singh announced plans to build international airport at Greater Noida. The next government led by Mayawati then announced a night safari in Greater Noida.

Envisioning massive levels of tourism, Jaypee decided to build on those projections, literally.

Plans included a cricket stadium that could seat 100,000 people, a tennis stadium and five townships on the Noida-Greater Noida Expressway (the first township, known as Wish Town, is yet to be completed).

Manoj Gaur perched the rest of the business on the demand he was expecting to see from this model—an increase in tourists would encourage people to buy flats on the expressway, which, in turn, would jack up real estate prices and lead to an increase in demand for cement and power, two commodities that his group produced and supplied, said the person quoted above.

The company’s goal: $15 billion in revenue by 2020, a steep rise from the under $1 billion ( 3,547 crore, exchange rate at 45/$) in 2005-06.

And then, the global financial meltdown reached the Indian shores.

Real estate prices nosedived and that was followed by a dip in the demand for cement. But there was no backing out for Jaypee—it had already signed the contract to host the Formula One races.

A messy pile-up

Construction and infrastructure companies typically have large debt but Jaypee’s debt, distributed over many companies, towers over them. To name a few cases for Jaypee, the 8,000 crore 1,320MW Nigrie thermal power plant in Madhya Pradesh was funded by debt to the extent of 70%, and the entire 1,000MW hydropower portfolio of 7,000 crore had a debt-equity ratio of 70:30.

Jaypee was not alone. A number of Indian firms saw a sharp rise in debt between 2012 and 2014 due to aggressive expansion plans, some of which failed to take off because of a weak economy and delayed project clearances. The Indian economy grew at a sub-5% rate (as per the previous gross domestic product data series) for two consecutive fiscals—2012-13 and 2013-14.

This had a spiralling effect on companies and banks, which are now sitting on a pile of bad loans and restructured debt.

According to an 8 June report by rating agency Icra Ltd, the Indian banking system has restructured over 4.5 trillion in advances over past three years.

“May be the timing was probably not right for Jaypee Group when we planned our projects," said a senior Jaypee Group executive, requesting anonymity.

“We had started most of our projects during 2007-09 when interest rates were much lower and GDP was growing at 8.5%," this executive said. “In hindsight, we should have estimated a 5.5% GDP growth instead of 8.5%. GDP growth halved while interest rates shot up," the executive said. Capacity utilization fell and costs escalated after the financial slowdown, while the group was more than doubling its capacity in power and cement segment, he said.

According to Sandeep Kumar Mohanty, principal consultant (energy and utilities), PricewaterhouseCoopers India Pvt. Ltd, the company had a robust plan in place and it was well poised to grow.

“The strategic vision shared by the Jaypee team seemed to have an element of truth," Mohanty said, referring to Jaypee Group’s plans to grow the business around the golden triangle.

Some of the investments in real estate and hydropower projects remain attractive even now.

“Hence, part of the failure of the business can be linked to policy paralysis, which devoured a lot of net worth in the infrastructure space, a slowdown in the global economy and falling quality of bank assets, depreciation of rupee and rising interest rates," Mohanty added.

An official from a private bank, who is closely tracking Jaypee’s debt-reduction efforts, said bankers erred in allowing the company higher borrowing limits even when they could not pay back their previously borrowed loans.

Between 2000-01 and 2007-08, banks had a high lending appetite and evaluated investment opportunities by looking at individual projects and may have overlooked the business and financial risks of the complete group. The result: several highly leveraged firms.

“We banks should have realized that this company’s revenues have been impacted which in turn impacts payment schedules. Now even fresh projects of the company, like the ($3-billion) microchip project(expected to come up in Uttar Pradesh) are stuck for want of funds," the private bank executive said on condition of anonymity.

According to another official representing a public-sector bank, Jaypee Group’s problems stem from its failed Yamuna Expressway project, which could not realize its potential return, as a result of which, the company could not meet its revenue targets.

“They had plans to develop real estate around the expressway, but even petrol pumps could not come up. One reason, perhaps, was the fact that the Bahujan Samaj Party-run (Uttar Pradesh) government (which cleared the plans) was replaced by one run by Samajwadi Party," the bank executive said.

Besides, though there was a shortage of power in Uttar Pradesh, the government did not have money to pay for it. The lack of transmission facilities meant power could not be transported to the southern states, which pay much more than northern states for power.

According to Mohanty, a few miscalculations, such as leveraging of assets and focus on investment-heavy businesses, will continue to haunt Jaypee.

“A fresh indicator of such decisions can be seen in the rates at which the company is poised to take over the captive coal mines for the Nigrie power plant, which do not even have a long-term power purchase agreement in place," Mohanty said. “Since the company was looking to divest the thermal asset for quite some time, it was probably not prudent to attach further liabilities to it."

The race to riches

As a project, Formula One was not profitable.

The revenue structure in Formula One racing is in favour of the Formula One management and not the circuit owner. From branding revenues to telecast rights, it all goes to the Formula One management. Circuit owners make money on tickets. In India, there were not many takers for tickets priced between 20,000 and 2.5 lakh for the 2011 race.

“They thought they will be able to sell tickets," said the Jaypee executive cited above.

The circuit owners have to pay the Formula One management $35-45 million a year as a licence fee. The initial contract is for five years. In addition to this cost, Jaypee Group spent $15-20 million annually in operational costs—track and event management, logistics and transport.

The operating cost totalled up to $50-65 million. It sold tickets worth $25 million and lost $40 million on the race every year. Over and above all these costs, Jaypee spent close to $400 million on building the race track.

Then came the controversies. The then Uttar Pradesh government backtracked on its promise (just four days before the third edition of the race) to not charge entertainment tax on the races.

At least 25% of the operational costs went to the government’s kitty as taxes. (The one reported freebie that the Gaurs did allegedly get was the land for the circuit, which was reportedly given by the Uttar Pradesh government as a part-payment for the Delhi-Agra expressway that the group was building at the time.)

That was not the only broken promise. The sports ministry declined to give it a no-objection certificate to hold the race, till the very last minute, creating a lot of uncertainty on whether the event would take place.

“Instead, they refused to consider motorsport as a sport. Rather, they asked Jaypee to put 10 crore in the National Sports Fund every year the race is held," the Jaypee executive said.

What saved Jaypee from piling up further losses was the issue of double taxation. The United Progressive Alliance (UPA) government was of the opinion that the drivers need to pay taxes. The Formula One management was of the opinion that they pay taxes in London and should not be forced to pay taxes again.

So, while the contract stands, the races won’t be held until the tax issue is resolved.

“Sometimes you think why did they get into Formula One at all?" said the executive.

For the Jaypee Group, it was a matter of prestige, Manoj Gaur had said in the May 2014 interview. “When you do certain things for the first time, it is about prestige."

Present tense

According to a Mint analysis, the 100 listed companies with the largest amount of debt saw a marginal 4% fall in their aggregate debt levels in 2014-15.

According to data from corporate database provider Capitaline, the debt of these firms stood at 13.42 trillion as of 31 March, compared with 14.04 trillion at the end of the previous financial year.

Jaypee, too, has cut its debt but it is still far from meeting its own targets. In the 2014 interview, Gaur had said he plans to reduce the group’s debt by 35,000 crore by the end of 2014-15 by selling the cement business, thermal and hydroelectric power plants and land that came under the group’s unit Jaiprakash Associates.

Jaypee’s debt, at the group-level, as of 31 March 2015, stood at 85,726 crore. Of this, the company expects to shave off 24,441 crore through asset sales by September. The company does not want to make any capital expenditure for the next five years, according to two people familiar with the development. The people, who aren’t a part of the group, said the focus will be on improving shareholder value.

As for new projects, the aim is to have a higher equity portion than was the norm in the past.

The focus, for now, will continue to be on debt reduction. The group is confident that all investment and commercial banks stand by its plans.

“We’ve created quality assets. You may ask any investment bank or commercial bank; they will vouch for the same," the Jaypee executive quoted above said.

Cutting debt

In the past year, the Jaypee Group has sold several assets and brought down its debt by 20,000 crore. In September, Jaypee’s power arm, Jaiprakash Power Ventures Ltd, announced the sale of two hydropower plants with a capacity of 1,300MW to Sajjan Jindal’s JSW Energy Ltd for 9,700 crore.

Two earlier attempts to sell the hydropower plants to Abu Dhabi National Energy Company PJSC (TAQA) and Anil Ambani’s Reliance Power Ltd had failed.

The JSW deal is expected to be completed by September.

It also sold a 300-acre plot along the Yamuna Expressway in May 2013 to the national capital region-based real-estate developer Gaursons India Ltd for 1,500 crore. In December, two of Jaypee’s cement factories and associated power plants were sold to UltraTech Cement Ltd for 5,400 crore.

The group also sold its entire 74% stake in a Bokaro-based joint venture with steelmaker Steel Authority of India Ltd (SAIL) for 690 crore in March this year. Last August, a grinding unit in Panipat was sold to Shree Cement Ltd for 360 crore.

Another asset awaiting sale is Jaypee’s 2.1 million tonne Bhilai Cement unit, expected to garner up to 1,800 crore.

“I think they are sincere and serious in cutting their debt," said the public-sector bank executive quoted earlier.

The next mistake

In 2013, Jaypee Group decided to enter the business of manufacturing microchips in a venture with International Business Machines Corp. (IBM).

It was to invest 18,000 crore through Jaiprakash Associates in the first phase and was targeting the Indian electronics market, which had annual imports of $31 billion in 2013-14.

But the venture may remain a non-starter due to fund-crunch and lack of business experience in the sector.

To be sure, the chip-making business is a lucrative one where several Chinese and Taiwanese companies have made their fortunes, and India today is among the world’s top three markets for smartphones, with a huge market for semiconductors.

But as a business venture, it stands in stark contrast to Jaypee’s existing portfolio and has the potential to backfire.

The semiconductor business is susceptible to fast-evolving technologies and hence companies in the space need to constantly invest in research and development, something which Jaypee doesn’t have the cash for.

“The risks and return horizons (of chip/semiconductor business) are much smaller than the traditional EPC (engineering, procurement and construction) business. The business could rise or could crash down much sooner than the EPC or infrastructure business," Mohanty of PwC said.

The Jaypee executive remains confident that the company will see a turnaround.

“We will be out of this trouble by March 2016, god willing," he added.

P.R. Sanjai and Joel Rebello in Mumbai contributed to this story.

Indian infrastructure companies borrowed heavily to finance extravagant expansion plans during the boom years. After the economy ran into a downturn, they found themselves weighed down by debt that they are still struggling to repay. In an April 2015 note, Credit Suisse noted that four of the 10 companies in House of Debt—an August 2012 report by the brokerage, evaluating 10 corporate houses that had the largest debt piles—had defaulted on some portion of their loans. Mint profiles four such entities to find out how they grew, what went wrong, and how they are trying to find redemption. This is the first part of the series.

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