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Bad struggle with debt

Operational hydro project sold to focus on coal-based projects

Jaiprakash

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Cash cows and white elephants: Jaiprakash Power Ventures (60% subsidiary of Jaiprakash Associates) concluded the much-anticipated sale of its operational hydro plants for a consideration of about R100 bn. Although the sale consideration was fair, it leaves JPVL with under-utilised coal-based power plants that need to service a sizeable debt, leaving no room for error on project stabilisation. For JPA, it further highlights its commitment to debt reduction even if at the cost of divesting cash cows. We have revised our target price for JPA to R44 (R52 previously).

JPVL focus to shift on coal-based assets: JPVL sold its ownership in two operational assets?Baspa (300 MW) and Karcham Wangtoo (1,000 MW) ?for an asset value of about R100 bn, of which equity value is R38 bn while the balance debt would be assumed by the acquirer. We note that as of March 2013, JPVL had a gross debt of R230 bn,of which R56 bn was attributable to the projects that have been put up for sale.

Upon conclusion of the current transaction, JPVL will have a debt of R166 bn (assuming entire proceeds are used to retire debt), that will have to be serviced from ramp-up of the coal-based projects?Bina (500 MW) and Jaypee Nigirie (1,320 MW) as well as resumption of Vishnuprayag (400 MW) that has been shut down for most of FY14 on account of the flood situation in Jharkhand.

We note that earnings predictability of assets sold was high, while risk to earnings for coal-based projects remains contingent on ramp-up of coal supplies. We currently factor operating profits of R20 bn from the residual 2,220 MW of operational projects in FY15 that will have to service the residual project debt.

JPA?more cement assets could be up for sale: JPA has a standalone debt of R219 bn with interest cost of R27 bn in FY14e, feebly supported by operating profits of R30 bn. JPA standalone has 19 mtpa of cement capacities, which operated at a utilisation rate of 69% in FY13 generating operating profits of R12 bn.

An improved utilisation rate of cement capacities (and a better pricing environment) coupled with stable contribution from construction and real estate business drive our earning assumption of R39 bn of operating profits in FY15e for the standalone entity. Jaypee Infratech (JIL), with gross debt of R80 bn and operating profits of R15 bn in FY2014e, appears better positioned to service its debt obligation, though continued monetisation of land banks remains an ongoing challenge.

Debt reduction coupled with ramp-up of residual assets remains key: JPA?s ability to convert its white elephants into cash cows remains the key for survival, a leveraged balance sheet will have corresponding windfall for equity holders. We have revised down our target price for JPA to R44 to factor delayed execution and higher risk for coal-based power projects as well as factored in higher standalone debt in the parent entity as reflected in the latest standalone financials.

?Kotak Institutional Equities

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First published on: 10-03-2014 at 03:41 IST
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