Jaypee seeks luck, third time round

Bankers say sale of power plants is important for it to reduce debt

The lifeline deal signed by Jaiprakash Power Ventures to sell its two power plants in Himachal Pradesh for Rs 9,700 crore to JSW Energy will help the Jaypee group to manage its debt crisis but bankers say the deal could run into regulatory and other roadblocks like JSW's fund raising capacity.

"JSW Energy is already highly leveraged... and that's a lot of money to borrow for an asset that yields 14 per cent equity IRR (internal rate of return). It would be interesting to see how JSW Energy will arrange for funds for the transaction," said a banker. JSW Energy had a debt of Rs 8,676 crore as on September this year and cash/cash equivalents of Rs 289 crore.

Bankers say another problem faced by the projects is the lack of proper land records. This may be just one of the problems faced by the new owners, bankers add. The agreement announced on Sunday said the deal was subject to "mutually agreed adjustments", without elaborating on what these were. The all-cash transaction is expected to close in the next financial year.

This is the third time the Jaypee group has signed an agreement to sell its operational hydro power plants. In March, Jaypee had signed an agreement with Abu Dhabi-based fund Taqa. In July, the group announced a transaction with Anil Ambani's Reliance Power.

In the latter, the transaction fell by September due to a valuation mismatch, while Taqa had withdrawn from the transaction, citing a "change in its business priorities" and paid a break-up fees of Rs 54 crore. Jaypee officials said on Monday they were optimistic that the deal with JSW Energy will close this time and there would be no turning back.

The deal with Sajjan Jindal-owned JSW Energy is only for two plants and hence the lower valuation as compared to a deal size of Rs 12,000 crore touted with Reliance Power. Bankers say the chances of a deal going through is much higher.

"Unless there is any last-minute hurdle over land records, we do not see any reason why this will not go through," said a banker, asking not to be named. "There is a lot of pressure from bankers on Jaypee to close the deal and pay its dues to banks," said an investment banker. "The fact that Jaypee is selling family silver shows the group is desperate to close the deal."

The deal is crucial for the group, which has debt of close to Rs 60,000 crore and the deal would help the company bring down its finance costs.

Analysts say the group flagship, Jaiprakash Associates, remains a highly leveraged bet on strong earnings revival, even as earnings estimates factor an optimistic recovery from the cement business, sustenance of construction revenues and ramp-up of new capacities under the power venture.

"In our view, JPA will have to continue with its asset sale strategy to deleverage the balance sheet, even as consideration of Rs 13,400 crore will likely be paid in the current year, based on sale of cement and power assets undertaken in FY2014," said a Kotak report dated November 17.

Analysts have revised earnings for financial year 2015 and financial year 2016 downwards by 70 per cent and 15 per cent, respectively, factoring lower earnings from the standalone real estate business, as well as higher interest cost, delay in commercial generation from Jaypee Nigrie (1,320 Mw), which was the mainstay of earnings growth in FY2015, and higher cost of generation from Jaypee Nigrie owing to de-allocation of associated coal blocks and increase in cost of generation.

The share price of JSW Energy closed 12.13 per cent up on the deal news at Rs 85 while JPVL was up 2.71 per cent at Rs 14.75.