JP Associates’ big dreams interrupted by swelling debt

‘No dream too big’ is the Jaypee group’s tagline, featuring on the cover of its latest annual report.

This line also succinctly sums up how the group came to pile on an unmanageable mountain of debt over the last five years.

In the 1990s, the group was primarily into hotels and cement. During the boom years of 2000-2007, JP Associates diversified into a variety of businesses. Most of these, particularly power, infrastructure and real estate, required prodigious amounts of capital that the group simply did not possess.

As it was commonplace for these projects to be financed mostly by debt, the group took recourse to borrowings while the going was good. Long-term loans on the group’s balance-sheet vaulted eight-fold from Rs 6,200 crore to over Rs 53,000 crore in the six years from 2006-07 to 2012-13. This included two tranches of Foreign Currency Convertible Bonds, the flavour of the season in 2006-07. While debt taken on to fund new ventures swelled, JP Associates’ revenues and cash flows simply didn’t keep up.

Since 2007, JP Associates’ consolidated debt has swelled eight-fold, but its revenue base has grown only by five times.

Cash flows trickling in from operations have been inadequate to fund the company’s prodigious capex investments in recent years.

Power projects

Given the long-gestation projects the group has taken on, there is no near term relief in sight on some of these forays.

Take the ambitious foray into hydro power projects. The JP group set up its first hydro power project in 1992 and announced plans to participate in over half of the hydro projects coming up in the Tenth Plan.

Twenty years on (2012-13), it had managed to commission power capacities of 2,200 MW.

But projects for over 10,000 MW are still under execution and are expected to be fully up and running only by 2018-19. In the meantime, the interest meter has been ticking, with the power venture running up loans of over Rs 21,000 crore.

Ventures such as the Ganga Expressway have stumbled on regulatory clearances. Others, such as the plan to develop a 5,000-acre Sports City along the Yamuna Expressway, have suffered because of the slump in the property market, particularly in that belt.

The parent’s hospitality business, which operates a plush golf resort and luxury hotels in Delhi, Agro and Mussoorie, came a cropper because of the domestic slowdown.

With luxury travel slumping and room rates falling sharply, the business made gross losses of Rs 372 crore last fiscal. The cement, construction and hospitality businesses now have loans totalling Rs 22,000 crore.

What has mounted pressure on the company to raise some quick cash now, though, is its shrinking interest cover.

In the latest June quarter, the company’s gross profit covered its interest payout by 1.4 times, far below the norm of 4-6 times.

This explains why, after holding on to it for so long, the company finally gave in and sold its Gujarat cement unit to UltraTech Cement at bargain-basement prices earlier this week.

(With inputs from Bhavana Acharya)

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