The Jaiprakash Associates Ltd (JPA) stock rallied sharply after the announcement of its September-quarter results in spite of weak earnings.

Its net sales increased by 6%, led by the construction and real estate divisions, the combined revenues of which increased by 12%.

Sales at the cement segment, which contributes two-fifths of the company’s revenue, was flat. Prolonged rain and excess capacities in some regions weighed on cement sales. While input costs rose, the pricing environment remained weak. This hurt realizations. Operating profit at the division more than halved to around 63 crore.

But thanks to healthy growth in the construction and real estate businesses, the company was able to contain the fall in overall operating profit (Ebitda excluding other income) to 3.6%. Compared to a year ago, its margin narrowed by 2.3 percentage points. On a sequential scale, though, it improved by 1.2 percentage points on strong performance at the real estate division.

The sore point continues to be high leverage. Interest costs surged 40% and usurped four-fifths of the company’s operating profit. But as the rally in the stock suggests, investors are not worried about the 47% fall in net profit. The confidence seems to have come from positive commentary from the management. In an interview to CNBC TV18, Manoj Gaur, JPA’s executive chairman, expressed confidence about sustaining the 8-10% growth momentum at the engineering and construction (E&C) division, which contributes 45% of the total revenue.

Gaur expects the execution of four-six projects that the company has in hand and construction activity in the real estate division to help revenue momentum at the E&C segment. Gaur also exuded confidence the company will announce some steps to reduce its debt by end-December.

That said, will deleveraging alone help the stock enter a structural uptrend? Considering that finance costs are eating up most of the company’s earnings, debt reduction is the immediate catalyst for the stock. But as a report from Citigroup Global Markets Inc. points out, the momentum can last only if the management refines its focus to certain core areas and curbs “unrelated diversification". That will help the company enter a sustainable growth phase.

The Citi report adds: “We believe that JPA has solid assets in its portfolio. But an overleveraged B/S (balance-sheet), perplexing diversification and RBI move to tighten liquidity works against the company. We believe the markets will not turn +ve on the stock unless management curbs its penchant for expansion/unrelated diversification and works on (1) consolidating, (2) selling down stakes in assets and (3) deleveraging."