Jaiprakash Associates (JAL) hogged lot of limelight last week when it declared its results although not for good reasons. The company reported defaulting on its principal and repayment dues almost to the tune of what it was worth ten years back..! Another growth story gone wrong..
JAL, a Cement, Power and Civil Construction company ten years back is currently engaged in eights different business segments – Real Estate, Infrastructure (Expressways), Fertilizers, Hotels and Healthcare other than the earlier three. Of these, four namely, Cement, Power, Construction and Infrastructure, account for more than 90% of the revenue. The company pursued relentless growth/ diversification, cashing-in on India’s growth story most notably related to highways and real estate development over last decade or so. It also derived significant advantage from forward integration, side-ward diversification such as the civil construction subsidiary undertaking the project work for expressways/ Hydro-Power plant construction or Cement division meeting all the needs of these divisions. It may be noted that inter-segmental revenue accounted for more than 25% of total revenue for the company in FY12 although the ratio came down subsequently.
As a result of this growth, its balance sheet size grew from less than Rs 10,000 crore (consolidated) in FY06 to more than Rs 100,000 crore in FY15, before easing off in FY16, almost 30% CAGR over nine years..! While the revenues had grown at nearly the same pace the company could not build upon this to improve its profit margins not only because of rising interest burden but also increasing other expenditure and write-offs on projects failing to take off etc.
Company’s real problem started somewhere around 2011-11 when the economy suddenly went into a decline specially the infrastructure related sectors. It may be noted that another company, GMR energy, (https://indiaeconomyandbusiness.com/2016/05/10/gmr-energy/), with some similar lines of business is also going through the same pain and restructuring. With the decline in economy conditions, many projects started getting stuck affecting the cash flows. As the results the company ‘s debt level went up manifold estimated at about Rs 75,000 crore now whereas its interest cost has risen from barely a few hundred crore to more than Rs 7,500 crore in FY16, nearly 36% CAGR over the ten year period. Profits which peaked in FY11 started declining subsequently, culminating it losses in FY14 which continues to remain so in FY15 and 16 also.
Clearly, the growth rate targeted by the company was not sustainable. It also took significantly high exposure in hydro power projects on the back of its civil construction capability and cement making capacity, two important ingredients for hydro projects. However these projects are highly capital intensive, have long gestation period and also subject to stringent regulatory requirement often leading to project getting shelved causing write-off of initial project expenditure. More than 90% of its total power plant portfolio (after part sale to JSW Energy) is under implementation implying a total investment need of more than Rs 50,000 crore for which there would hardly be any takers.
So, what is the way out for the company..?? The company has managed to find a buyer for a big part of its Cement business and also managed to sell its running power plants, relatively stable businesses within its portfolio. However, even after this, the debt level would continue to remain as also its needs for cash to complete its ongoing projects. Let’s hope that it finds buyers for some more of its business to meet its stated objective to bring down the debt further. If it has to compromise a little more in terms of valuation for these businesses which have lesser revenue certainty it would not be a surprise.
(Image courtesy of JAL website)