Jaypee Group struggles to emerge from the debt pile

The decade gone by has not been a memorable one for the 37-year-old Jaypee Group.

For in these years, the tide of corporate fortunes appears to have turned decisively against the diversified group with interests from construction to cement to real estate to hospitality to expressways. So much so that it has gone from being one of India’s fastest-growing conglomerates to one that is saddled with a mountain of debt so high that the group has been compelled to sell off its assets to service the debt.

The total debt of Jaypee Group companies is estimated to be around ₹75,000 crore as on March 31, 2015, according to foreign brokerage firm Credit Suisse’s eyebrow-raising report of last year, titled ‘House of Debt’. 

Although the avalanche of bad news about the extent of the group’s debt woes may have been triggered off in recent years, the first signs of trouble manifested themselves a few years ago.

As far back as in 2010-11, analysts had become highly sceptical of the precise level of the group’s debt.

Jaiprakash Gaur, who once worked for the Uttar Pradesh government, founded Jaiprakash Associates Private Ltd in 1979.

Gaur’s early entrepreneurial life was centred around his experience as a civil contractor; it was then considered one of the most prestigious businesses, and Gaur excelled in it.  Building on these core values, Gaur and his son Manoj Gaur, the Executive Chairman of Jaiprakash Associates Ltd, built a multi-billion-dollar conglomerate with prime assets in the power sector, cement and road infrastructure. Today, however, the group finds itself compelled to sell off these very assets –– just to ease its debt burden. 

“What Jaypee Group did was to spread debt across its unlisted subsidiaries,” says a Mumbai-based investment banker, on condition of anonymity.

“These were subsidiaries handling various projects. Everything from hydro power to its sporting ventures, including the Buddh International Circuit, was housed under separate subsidiaries, which carried their own debt.”

By the time Credit Suisse’s House of Debt report was out in 2012, Jaiprakash Associates Ltd had 19 subsidiaries.

The group’s total capital employed had ballooned to ₹69,357 crore as on March 31, 2012 from ₹ 9,348 crore as on March 31, 2006. While capital employed can be defined in several contexts, it is generally a measure of the investment made by a company across its assets. As on March 31, 2015, the group’s consolidated capital employed stood at ₹88,414 crore.

In 2012, Jaypee was expected to cash in on its crown jewel: the Yamuna Expressway Project. Jaypee had won the 165-km-long expressway project in 2003, and had rights to develop five townships with a real estate value of ₹1.5 lakh crore.  

However, the housing projects here still remain incomplete, and barely a year after the expressway became operational, Jaypee had to sell a 300-acre land parcel to Gaursons Ltd for a little more than ₹1,500 crore. “If the timing had been right, it could have done to Jaypee what Gurugram did to DLF. But the real estate market has just not recovered since 2008,” the banker said.

Most industry observers and analysts say the downturn in Jaypee’s fortunes can be traced to a combination of the economic realities after the 2008 global financial crisis as well as the group’s diversification into unrelated areas.

Jaiprakash Associates’ share price, which had more than tripled in less than two years, from ₹64 in April 2006 to ₹315 in January 2008, subsequently suffered an irrecoverable shock. After hitting a low of about ₹ 39 in October 2008, the share prices recovered for two more years, but then reports of high debt began to emerge. Shares of the company have been on a downward spiral since then; on May 16, the stock closed at ₹6.50. The management was aware that the debt pile-up needed to be cut –– and quickly, at that.

Among the three pillars of the Jaypee Group’s strength was its cement business, which was established in 1986. In 2013, for the first time, the group had to sell its cement plants. A cement manufacturing unit in Gujarat was sold to Aditya Birla Group’s UltraTech Cement. In return, ₹3,650 crore of debt of the plant was taken off Jaypee’s books, and ₹150 crore of equity was given.

A year later, Manoj Gaur, Executive Chairman of the Jaypee Group, went on a media offensive, giving a series of interviews to television channels and media houses. Gaur said then, “We are conscious that all our investors are aware that all three listed companies of the Group grew and completed all the projects they undertook, but in this process they piled up debt of ₹65,000 crore. Today, assets (even at fair value), with the potential of real estate, are in excess of ₹1 lakh crore. And yet, the overhang of debt has not allowed the share prices of the companies to reach their deserving level. That is what we need to correct, and we shall do so.”

BusinessLine ’s attempts to secure a response from the company to this article yielded no response.

The Group’s power-producing arm –– Jaiprakash Power Ventures Ltd –– was to follow suit. After two unsuccessful attempts, it finally sold two of its prized hydro power assets –– Karcham Wangtoo and Bapsa II –– to Sajjan Jindal’s JSW Energy in 2015.

According to Jaypee’s investor presentation, the deal helped lower debt by ₹5,800 crore and infused cash inflow of ₹3,839 crore.

Still, Jaypee had to sell even more to reduce its pile of debt, which had grown to ₹75,000 crore by March 31, 2015. Stake sales in the cement business followed; 74 per cent stake was sold in the Bokaro joint venture with Steel Authority of India Ltd, and a 1.5 million tonne cement griding unit was sold to Shree Cement. But the two deals could only raise ₹1,050 crore for the company. In 2016, perhaps left with no other option, Jaypee agreed to sell its entire 22.4-million-tonne cement production capacity to UltraTech. In return, UltraTech will take on ₹13,500 crore of debt and pay around ₹3,000 crore to Jaypee. In essence, Jaypee’s 30-year association in the cement business stands to vaporise for a little more than ₹5,000 crore.

“The final deal, announced in February, to UltraTech was definitely a fire sale, given the quality of Jaypee’s cement assets. The deal values the Jaypee assets at $110 a tonne as against the market cost of $140 a tonne,” a senior official with an audit and consultancy firm said on account of anonymity.

“The real problem I see going ahead for the group is that revenue-generating quality assets like cement plants and power plants have been sold. Perhaps it was forced to as valuations in the infrastructure and real estate business had drastically fallen off. However, to come back from this requires immense efforts,” he added.

To put things in perspective, Jaypee’s hydro plants took over two decades to build. The cement business grew to be the third-largest in the country over three decades. The Jaypee turnaround, if it ever happens, won’t happen overnight.