Reduction of debt, according to Jaypee Group Chairman Manoj Gaur, is akin to a weightlifter shedding weights till he can lift with a smile. In the corporate world, a group or a company needs to reduce its debt to the level where it can work without affecting its operations. The weightlifter analogy was Gaur’s first response after inking the biggest domestic acquisition agreement in the last two years-the sale of Jaypee’s cement unit in Gujarat to UltraTech Cement of the Aditya Birla group for Rs 3,800 crore in a non-cash debt-swap deal.

But that deal won’t be enough to end the group’s debt woes. According to Credit Suisse, the group, which has interests in engineering and construction, real estate, cement, power, information technology and hospitality, had a debt of Rs 64,000 crore on its books at the end of March 2013. The group, on its part, says the current debt is Rs 56,000 crore: Jaiprakash Associates, which is into construction and engineering, has a debt of Rs 23,000 crore; Jaiprakash Power Ventures, which is into power production, has Rs 20,000 crore; and Jaypee Infratech, the real estate development arm of the group, has Rs 7,500 crore. The average rate of interest for the group is not known. Assuming it is 12 per cent per annum, the annual interest outgo for the group could be as high as Rs 6,720 crore. This makes the quarterly interest outgo Rs 1,680 crore and the monthly outgo Rs 560 crore.

Selling spree

A financial burden like this could impact the cash flows of most business houses in the country, given the slowdown in the economy. So, the group is keen to reduce the debt burden further by putting more assets on the block. Followed by the sale of the Gujarat unit, the group is reportedly in final stages of talks to sell its hydropower projects to Abu Dhabi National Energy Company PJSC. Though the exact details of the assets on the block are under wraps, Jaypee Power Ventures operates three hydropower projects in the country: 300 MW Baspa II (Himachal Pradesh), 400 MW Vishnuprayag (Uttarkhand) and 1,000 MW Karcham-Wangtoo (Himachal Pradesh). The group also plans to monetise its other cement and power assets, and is also in the hunt for strategic partners to reduce debt, though group officials claim that servicing debt is not a major issue now.

All told, the group wants to bring its debt down by another Rs 15,000 crore from the current Rs 56,000 crore. What perhaps makes Gaur sanguine is the huge land bank available with the group companies. “If we have a debt of above Rs 56,000 crore, we are also sitting on a land bank worth Rs 70,000 crore,” says he. Analysts say that the land bank of over 8,000 acres indeed gives the Jaypee Group some leverage against the debt pileup. “We have already sold 300 acres of land for Rs 1,500 crore. Talks are on to sell another 300 acres of land, though a lot would depend on the prices,” says a group official close to the development. Through bulk land sale, the group is looking to bring down the debt of Jaypee Infratech by about Rs 5,000 crore, from the current Rs 7,500 crore.

“People speak about (our) mounting debt only, but no one speaks about (our) achievements. We built the biggest power plant during the 11th Five-year Plan, and have put up the maximum number of projects in Jammu & Kashmir. We are the largest (private) power producer, and the third largest player in both cement and real estate in the country. All these add value to us,” says Gaur. However, he adds: “Our aim is to bring down the debt in various companies to a comfortable level.”

A tough challenge

But the monetisation of real estate won’t be easy. For one, most builders are struggling with cash-flow problems. That’s because most of them are sitting on huge inventories. According to a recent study by real estate consultancy Jones Land Lasalle, Mumbai has inventory of 48 months, Bangalore of 25 months and Delhi (the National Capital Region) of 23 months. This is way beyond the comfortable levels of 14 to 15 months. This is yet another indication that there is a bubble in real estate. The National Housing Bank, based on a study of transaction data from banks and housing finance companies, has said that prices fell in 22 of the 26 cities surveyed in the quarter that ended in June compared to the previous quarter. Investment analysts at Edelweiss Securities expect developers to cut prices by 15 per cent in Mumbai and the National Capital Region and by 10 per cent in Bangalore because of liquidity concerns and the inventory buildup.

The liquidity in the market will get crimped further now that the Reserve Bank of India has cracked down on the 80-20 scheme: buyers were required to pay only 20 per cent upfront, and the equated monthly installments, or EMIs, would start only after two years. During this period, the builder would pay the EMIs to the bank or the housing finance company. This had given a huge boost to the demand for residential real estate. In this scenario, for the Jaypee Group to get the price it has in mind will not be easy. As it is, for the Gujarat cement business, it had to settle for Rs 500 crore less than its initial asking price of Rs 4,300 crore.

One question begs an answer here: what brought things to such a pass? While the slowdown may have played a role, it is also true that the Jaypee Group expanded at a fast clip in the last few years. It invested huge sums of money in real estate, the Yamuna Expressway connecting Greater Noida with Agra and the Buddh racing track for Formula1 cars. “It is the over-aggressive strategy of diversification, in which it created at least 12 subsidiaries within a span of four or five years, that has created trouble for the group. It came to a stage where the deal (with UltraTech Cement) became a necessity,” says an industry expert. Rahul Kumar, chief financial officer of Jaypee Group, defends the diversification: “Expansion hasn’t flopped. We are going to reap the benefits in the long run. No one had expected the economy to have such a bad downturn; that’s where the problem started for us and is forcing us to go slow.”

In the cement deal, UltraTech Cement will take over the debt of Rs 3,650 crore of the unit and will issue equity shares worth Rs 150 crore (the fresh issue will result in expansion of just 0.32 per cent in its equity capital) once the transaction is complete. The sale is subject to the approval of shareholders and creditors, the sanction of high courts and the nod of the Competition Commission of India. As far as the deal is concerned, analysts see it as a win-win one for both Jaypee and UltraTech. “The Gujarat unit has a poor trade and non-trade mix. Even though the initial valuation was higher, in the current scenario with debts mounting, this was not a bad deal for Jaypee either,” says V Srinivasan of Angel Broking.

After the deal, UltraTech Cement will remain the country’s largest cement maker, followed by Holcim, while Jaypee Group will remain the third largest player. So there will be no change in the pecking order. “The bronze medalist would remain the bronze medalist even after the deal, with about 33 million tonnes of annual capacity and plans to produce 27 million tonnes this fiscal,” Gaur says.

According to sources, the mounting debt has forced the group to go slow on several of its expansion projects. Jaiprakash Power Ventures has no new investments lined up, apart from capacity addition at Nigrie in Madhya Pradesh and Bara in Uttar Pradesh, which would need investments worth Rs 2,000 crore more. Is it finally time for the weightlifter to smile?

Courtesy: Business Standard