JP Associates: Asset monetisation gaining pace

The four deals it has done the past 12 months has enabled it to cut its debt by Rs 16,000 cr

Shrugging analysts’ doubt about monetisation of the assets, JP Associates (JP) has surprised the Street with over four asset monetisation (sale) deals over the past 12 months. Thanks to these deals, including the recent agreement to sell 74 per cent stake in Bokaro-based cement plant to Dalmia Cement for Rs 690 crore (enterprise value at about Rs 1,150 crore), the company will be able to cut its consolidated debt by Rs 15,940 crore. Earlier, it had announced a deal involving sale of its hydropower assets for an enterprise value of Rs 10,500 crore. Together, the proceeds from the asset sale and transfer of associated debt of these assets (to new owner), should improve JP’s debt-equity ratio as well as enhance liquidity for the remaining businesses. For instance, as a result of these deals, analysts are estimating JP’s consolidated debt-equity ratio to reach 2.9 times in FY15 (from 4.1 in FY13) while for interest cover ratio (earnings before interest, tax and dividend/interest cost) after falling from 1.2 times in FY13 to 0.9 times in FY14, it is seen improving to 1.1 in FY15.

“The company’s ability to convert its white elephants into cash cows remains its key to survival and a leveraged balance sheet, which will have a corresponding windfall for equity holders,” said Kotak Securities in its note. Currently, the company is sitting on a huge asset base and many of these assets are considered to be non-core and contributing very less to the profitability. This is also a reason its sales turnover to assets ratio is one of the lowest in the infra industry at 0.2 times implying very low utilisation.

Bokaro unit sale
Meanwhile, the Street is happy that some of these assets are getting sold and at good price. For instance, the Bokaro-based 2.1-million-tonne cement plant was operating at just 59 per cent capacity utilisation. And it was contributing revenue of Rs 630 crore and net profit of Rs 140 crore. “Although the deal is small relative to the Rs 63,100 crore debt of JP, it helps in right sizing the balance sheet, in doing away with less productive assets,” said Kotak Securities.

Even if through this deal the company is able to reduce its debt by about Rs 1,000 crore (Rs 690 crore of proceeds and Rs 278 crore debt), it will theoretically (assuming interest rate of 12-14 per cent) help save about Rs 120-140 crore annually in interest cost. Moreover, the company has sold the plant with hefty gain. JP said the consideration for the transaction works out to approximately Rs 69.74 a share as against its cost of Rs 18.57 a share. Although the Bokaro-unit deal valuations at $90 a tonne are lower than around $120 a tonne it got for its Gujarat unit, it is higher than analysts’ estimate.

“We believe JP Associates has been able to negotiate a good value for this grinding unit. We had earlier expected the transaction to happen at an EV of $70-75 a tonne,” said an analyst with foreign broking house. Shirish Rane, who tracks the company at IDFC Securities, says, “The valuations are attractive and are at a significant premium to replacement cost $50-55 a tonne for a greenfield grinding plant.”

The way forward
We expect further de-leveraging through sale of more cement capacities and thermal power plants, says Rane. The company has about cement capacity of about 33 million tonnes, which is worth (assuming Gujarat unit’s sale valuation) about Rs 26,000 crore. The list is long and includes real estate, hospitality, infra assets, etc. An improvement in economic environment should only help boost JP’s fortunes and valuation of its assets.