Monday, August 26, 2013

Jaypee Group - Can Stake Sales Save it From a Lethal Debt of Rs. 63,654 crore?

From humblest of beginnings in 1958, Jaiprakash Gaur built up the Jaypee Group which has successfully undertaken some of the largest and most prestigious projects in this country like Sardar Sarovar Dam, Yamuna Expressway, Buddh International Formula 1 Circuit, and Karcham Wangtoo Hydroelectric Project, overcoming seemingly insurmountable challenges. Today, a formidable team of 80,000 committed professionals led by Jaiprakash’s eldest son Manoj Gaur are working across 40 locations, spread across 14 states of India, to churn out an aggregate annual turnover of over Rs. 23,000 crore and build up on an asset base that is already above Rs. 73,000 crore, with a mandate to develop five townships worth Rs. 1,50,000 crore, even as it battles to overcome a lethal debt estimated recently by Credit Suisse at around Rs.63,654 crore. From once nothing to scaling Everest and down to plains again, can Jaypee climb back to glory? Manoj Gaur is sure that Jaypee Group can do it, as he has seen this company, founded by his father, doing even more formidable tasks in its long chequered history.

In the beginning there was nothing. Absolutely nothing, except for a young civil engineer’s plan to quit a short stint with UP Government to start a small contracting business.

The year was 1958. Jawaharlal Nehru was still India’s PM. Kapil Dev, Sanjay Dutt, & Anil Kapoor were yet to be born. Bajaj Auto was still to obtain a licence for making autos.

With not even a hint of economic liberalization visible on the horizon, and living deep inside a socialist and licence raj, not many young engineers would have resigned from a plum government job to get into business.

But then Jaiprakash Gaur was a bit different. He had obtained his Diploma in Civil Engineering from University of Roorkee (now IIT Roorkee) in 1950. An eight year long career with the UP Irrigation Department was enough to convince Jaiprakash that he could do much more if he ventured out on his own.

Since he had exposure in the hydroelectric sector, Jaiprakash naturally took on dam related works. Capital was tough to come by as he was already reeling from the death of his elder brother and failing health of his father.

So, Jaiprakash took on various partners, some of whom who stuck with him, and some who deserted him when he took on bigger and bigger projects beyond his capacity. Jaiprakash had his quirks like opting for a telegram address that read ‘IRONWILL’, to inspire his employees and send a message to associate companies that he would deliver whatever it takes.

By 1969, Jaiprakash Associates was formed as a partnership with six partners including his younger brother and brother-in-law, who all remained shareholders since then.

Late 70s proved to be the real game changing period for the contracting firm as it bagged some of the largest projects India has ever built, including the Sardar Sarovar Dam in Gujarat which is India’s largest, and Tehri Dam in Uttarakhand which is India’s tallest.

1979 saw Jaiprakash Associates Pvt Ltd being officially formed to undertake these works as well as the firm bagging its first overseas contract for $112 million - then a princely sum - in Iraq.

The going was not always smooth, and legend has it that Jaiprakash’s eldest son, Manoj Gaur, who was still a young boy, had to chip in to assist dad in pacifying a major strike at Sardar Sarovar site.

From dams and infrastructure, Jaiprakash ventured out into hotels, opening Hotel Siddharth and Hotel Vasant Continental, both in Delhi, just in time for the 1982 Asian Games held at the capital.

By 1986, Jaiprakash Gaur had taken his next major steps, of getting into cement manufacturing and going public by constituting Jaiprakash Industries Ltd (JIL). 1986 also saw Manoj Gaur joining the company soon after completing his civil engineering degree from BITS, Pilani.

But the 90s proved to be a very challenging period for JIL. An ambitious foray into private hydroelectric power, the Iraq-Kuwait War, and the cement price crash nearly finished off the group due to a severe cash crunch. But the Iron Will prevailed.

Jaiprakash Associates’ stock was valued at just Rs. 9.79 in June of 2004. Just an year back, in 2003, Jaiprakash Associates Ltd (JAL) was formed by the merger of Jaiprakash Industries Ltd (JIL) and Jaypee Cement Ltd.

JIL, the infrastructure and construction flagship of Jaypee Group had a listed history from 1986 onward. But the stock market crash of 2000-01 had taken its toll on every stock including JIL.

But the amalgamation in 2003 prepared the groundwork for impending magic. The merger, however, was just a return of offspring to parent, because it was in 2001 that the Group’s three cement plants under JIL were hived off to form Jaypee Cement Ltd. But this time, the reorganization worked its magic.

Within the next five years, everything worked for Jaypee like a charm. Manoj Gaur was steadily assuming the leadership role in the Group. In 2003, Jaypee landed the Yamuna Expressway, India's longest six-laned controlled-access expressway to be built at a total project cost of Rs. 12,839 crore, connecting Greater Noida to Agra.

The project has been unique in that Jaypee got development rights for five townships along the 165 km long route, which translates to a real estate value of Rs. 1,50,000 crore. Jaypee also commissioned several hydroelectric, thermal, & captive power plants during these five years.

In 2007, it landed the prestigious Formula One Indian Grand Prix by starting work for the Buddh International Circuit.

The magic worked on the stock prices too, and that is how Jaiprakash Gaur and Manoj Gaur, the wealth creators also became wealth sharers. From Rs. 9.79 in 2004, Jaiprakash Associates’ stock price shot up to Rs. 340 by 2008, making it a nearly 35X multibagger within as little as 5 years. Jaypee Power Ventures similarly shot up from Rs. 30 in 2005 to Rs. 144 in 2008, which was a nearly 5X appreciation within 3 years.

But that all are history now. Taking on larger and larger projects has been taking its toll on Jaypee for the second time. Accelerating the trouble was the 2008 global financial crisis that battered Indian infrastructure sector and its stocks, due to its heavy indebtedness. Jaiprakash Gaur who had resigned from executive role in 2008, however, pulled on till 2010 before resigning finally in 2010.

It goes to the credit of now 47-year old Manoj Gaur that despite the difficult situation since 2008, the Group could fulfil its core commitments like the Buddh International Circuit by 2011 and Yamuna Expressway by 2012 (though on a two year delay).

However, the Group is only a pale shadow of what it used to be. Jaiprakash Associates’ stock price and market capitalization has fallen by nearly 92% from the 2008 peak. Jaiprakash Power Ventures has fallen by 94% during the same period. And for Jaypee Infratech, the company in charge of Yamuna Expressway, it has always been a fall from the post-IPO high, shedding in value by over 85%.

The problem of course is mounting debt. The three firms put together has run up a lethal debt, estimated recently by Credit Suisse at around Rs. 63,654 crore.

But Manoj Gaur is unfazed. Like his father’s ’Iron Will’, his motto for Jaypee reads ’No Dream Too Big’. Putting aside the debt factor, Jaiprakash Associates’ EBITDA has grown by a CAGR of 14% from FY’09-FY’13. And both Jaiprakash Power Ventures’ and Jaypee Infratech’s EBITDA have grown by a CAGR of 47% each, which is very impressive indeed.

Despite the debt and despite the market fall, Jaypee has been steadily increasing in size. Across its three listed companies, their subsidiaries, and unlisted companies, the Group employs a committed workforce of 80,000 persons working at more than 40 locations, spread across 14 states of India. That is how, Jaypee Group as a whole has attained an aggregate turnover of over Rs. 23,000 crore and an asset base of around Rs. 73,000 crore. The real strength to note in the Group is that each of the three listed entities have been equally strong in growth performance during the last four years from FY‘09 to FY‘13.

Jaiprakash Associates Limited (JAL) has more than doubled its turnover from Rs. 6152 crore to Rs. 13512 crore at a CAGR of over 22%. JAL’s Net Worth has grown from Rs. 6352 crore to Rs. 13079 crore at a CAGR of 20%. JAL’s demonstrated expertise is second to none in their core engineering and construction field. The team which built Sardar Sarovar, Tehri, & Nathpa Jhakri, as well as the maximum number of mega projects by any company in Jammu & Kashmir, has completed 10,000 MW of Hydropower Projects between 2002 to 2011 in India and Bhutan. That is why JAL continues to attract and execute even larger projects and up gradations. This flagship firm of Jaypee is currently building two dams and two power houses in Bhutan, a 51 km tunnel in Andhra, a 450 MW Stage-II project in J&K, and a project to increase height of Sardar Sarovar from 122 metre to 146.5 metre. JAL’s Cement Division as well as of subsidiary companies, across 10 states, together add up to 33.3 MnTPA, which places it among the top-4 of cement manufacturers in the country. JAL’s realty division plans to complete 9.3 lakh sq.m over a period of five years, mainly in the NCR region.

Jaiprakash Power Ventures Limited (JPVL) is also on a strong footing. From FY’09 to FY’13, JPVL has achieved an over fivefold increase in turnover from Rs. 419 crore to  Rs. 2291 crore at a CAGR of over 53%. Networth has grown close to six times from Rs. 1088 crore to INR 6444 crore at a CAGR of 56%. Jaiprakash Power Ventures Limited is now India’s largest Hydropower producer in the private sector with a generation capacity of 2200 MW. Major projects include 1000 MW Karcham Wangtoo HEP which is India’s largest hydropower project. Upcoming commissioning of Super Critical Nigrie Thermal Power Plant (2 x 660 MW) and Super Critical Bara Thermal Power Plant (3x660 MW), the generation capacity will be 5500 MW. Vishnuprayag HEP and Baspa – II HEP have been earning VERs from 2007-08 and 2008-09 respectively. Karcham Wangtoo HEP is eligible for 3.35 million CERs. Amelia North Coal Block dedicated for Nigrie Thermal Power Plant is under development and coal production will commence in September 2013.

Jaypee Infratech Limited (JIL) is perhaps the most promising company. From FY’09 to FY’13, revenue of JIL has increased close to six times, from Rs. 556 crore to Rs. 3292 crore at a CAGR of 56%. Net Worth has grown close to five times from Rs. 1245 crore to Rs. 6180 crore at a CAGR of 49%. As part of JIL’s Real Estate revenue stream, over 280 towers are in various stages of completion in Wish Town, Noida, an Integrated City spread across 1150 acres, which today has over 30,000 customers. It’s a model integrated city showcasing how new cities shall come up in developed India for a healthy lifestyle, with myriad modern facilities including social infrastructure of schools, medical and sports centres besides commercial spaces. JIL is a unique infrastructure company in that it has two revenue streams - toll revenue for 36 years and real estate revenue from development of over 280 lakh sq.m over next 20 years.

But the debt won’t go away on growth momentum. So, Manoj Gaur has embarked Jaypee upon a focused plan of de-leveraging across businesses, which will yield results in the next few months. Talks with Ultra-Tech to sell 51 per cent equity in their 4.8 MT Gujarat Cement plant are at an advance stage. Similarly, talks for selling stake in some power plants are also progressing well.

As things stand now, no dream is too big for Jaypee. May be no big dream is too easy either. But then, neither does Manoj Gaur or Jaypee expect things to be easy. The performance from this team will be watched keenly by 10,00,000 shareholders across three listed firms.

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