Huge debt of Rs 46,000 cr weighs heavy on Jaiprakash Associates

The stock may not gain lost ground any time soon as the company’s debt of close to Rs46,000 crore has been a concern for investors for a long time.

Jaypee Infratech Ltd.

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The recent fund-raising and conversion of Foreign Currency Convertible Bonds, or FCCBs, provide Jaiprakash AssociatesBSE -1.99 % the needed cushion to meet its near-term capital needs. In the coming quarters, the company's cash flows are expected to improve as many of the projects are set to be commissioned.

Over the last three months, the company's stock has seen a sharp correction due to a stream of events. First, the stake sale in its cement business did not materialise after initial talks. Second, the company raised $100 million (about Rs540 crore) through a Qualified Institutional Placement, or QIP, at Rs83 per share.

Besides, the company's FCCB worth $40 million (about Rs217 crore) of the $150 million (about Rs 810 crore) issued in the previous quarter were converted at a price of Rs 77.5 per share. To top it all, the offer for sale, or OFS, of its subsidiary, Jaypee InfratechBSE -0.93 %, was deferred due to a sudden fall in its stock price. The recent QIP and its internal cash flow will be adequate to meet its capex requirement in the coming quarters.

The stock may not gain lost ground any time soon as the company's debt of close to Rs46,000 crore has been a concern for investors for a long time. However, with no new projects in the pipeline, debt may rise only marginally, primarily due to the company's need for funds for its under-construction projects. But its profits are likely to be under pressure due to the high interest expense. In the quarter ended December 2012, its interest expense was 76% of its operating profits.

Jaiprakash Associates' revenues from the construction division rose marginally by 2% in the December 2012 quarter. Once the major projects are completed, revenues may decline from this segment in the coming quarters. Revenues from its cement division showed a muted growth of 6% y-o-y owing to subdued demand. In addition to this, higher freight costs led to a drop of 700 basis points in operating margins. However, an uptick in its real estate division partially offset the lower revenues from the other segments.

In the coming quarters, significant real estate monetisation will be the key for any improvement in revenues. The company, under its subsidiary Jaypee Infratech, has five land parcels of 1,235 acres each along the Yamuna Expressway. It has just developed only one of its land parcels so far.

At the current market price ofRs76, the stock is trading at a priceto-book value of 1.4. At the current price, it factors in the high debt of the company. Deleveraging its balance sheet will be the key trigger for any uptick in its stock price.