JP Associates: Cracks widen

Even as Jaiprakash Associates is accelerating its plans to monetise assets, rising interest costs continue to hurt its profitability. And this comes at a time when some of its businesses are under pressure. This is evident in its results for the quarter ended December 2013, wherein operating profits at Rs 719 crore were not enough to cover the interest costs of Rs 752 crore. As a result, the company reported a net loss of Rs 88.7 crore for the quarter versus a net profit of Rs 111 crore last year. The concerns over high debt are unlikely to ease soon as a result of delays in asset monetisation, and will keep the stock under pressure.

"We remain concerned over the rising debt level and delay in the monetisation of assets. We also incorporate rise in debt in our valuation and revise our target price to Rs 42 a share (Rs 55 a share earlier) and downgrade it to hold recommendation," said Deepak Purswani, who tracks the company at ICICI Direct.

The debt pressure comes at a time when businesses like cement and real estate (two large profit contributors) are going through a lean period. For the quarter, the company reported 7.7 per cent year-on-year decline in revenues to Rs 3,138 crore. Segments like cement, which account for 42 per cent of revenues, saw revenues fall seven per cent to Rs 1,371 crore.

Thanks to construction, which grew 14 per cent in revenues to Rs 1,459 crore primarily on account of some of the completed projects being booked in the quarter, the company was able to manage its financials to some extent. For instance, the cement business alone had a negative 77 per cent impact on the company's earnings before interest and tax (Ebit).

Analysts believe despite higher per tonne realisation (up Rs 24 to Rs 4,155), the business' operating profits fell Rs 110 a tonne to Rs 540 on higher operating cost and lower plant utilisation. Cement volumes declined 11.8 per cent year-on-year. The impact on profits, again, was partly compensated by the construction business, which saw 49.4 per cent growth in Ebit - Ebit margins in the business jumped 695 basis points to 29.7 per cent. However, here as well, analysts fear there could be aberrations because of the one-time revenue and income booked for some completed projects. They believe that on a sustainable basis the margins in this segment should be in the region of 18-20 per cent.

Nevertheless, in the backdrop of the results (cement volume decline) and debt concerns, analysts like Deepak Purswani are lowering their estimates. The company has seen its standalone gross debt rising from Rs 24,343 crore in FY13 to Rs 27,200 crore at end of December quarter.

"To factor in the sharply lower than expected cement volumes and higher cost we have cut our FY14/FY15 Ebitda estimates by three per cent/seven per cent," said Emkay's Ajit Motwani and Nitin Arora. They add that current debt maturities (due less than 12 months) of long term liabilities stands at Rs 4,100 crore majority of which they believe will get refinanced at higher interest cost which will shrink the spread between the interest cost and Ebitda putting the debt rollover at risk. Hence, the downgrade on the EPS level is steeper led by higher interest costs, leading to EPS cut of 127 per cent/65 per cent for FY14/FY15.