Feb 12, 2013 12:46 PM IST | Source: CNBC-TV18

JP Asso Q3: Soft margins led to weak result, says Kotak

Murtuza Arsiwalla of Kotak Institutional Equities believes the company's construction and real estate figures look lopsided. According to him, margins across segments took a beating and contributed to the poor performance in Q3.

Jaiprakash Associates reported over 64 percent decline in its standalone net profit at Rs 110.93 crore in the third quarter of FY13. The company's net sales however went up by 15.32 percent at Rs 3398.39 crore during the quarter ended December 31 against Rs 2947.01 crore in the same period last fiscal.

Murtuza Arsiwalla of Kotak Institutional Equities believes the company's construction and real estate figures look lopsided. According to him, margins across segments took a beating and contributed to the poor performance in Q3. Besides, Arsiwalla feels liquidity constraints may be weighing on Jaiprakash Associates at the moment.

In order to cope with the liquidity problems, Arsiwalla thinks, an asset sale or equity dilution can be a good way of reducing their overall debt burden. He is also in favour of operational ramp ups that can address the issue.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Were you disappointed with the Jaiprakash Associates numbers?

A: When you look at the standalone numbers of Jaiprakash Associates, construction and real estate tends to be pretty lopsided. So, this quarter the real estate revenues nearly doubled to about USD 6 billion, which did mean a revenue beat but the margins across segments, be it cement, construction or real estate were soft. To that extent, the company has leveraged and the impact on bottom-line is pretty significant.

Q: Do you subscribe to the rumours or the news that is doing the rounds that they have been unable to pay some of the penalties because of liquidity issues. Did your discussion with the management throw up the very constrained liquidity position?

A: My view on that is yes, Jaiprakash is a highly leveraged company because they have had pretty aggressive capacity additions, but the quantum of penalties that is being talked about is pretty small for a company of Jaiprakash's size. Maybe it is a little exaggerated but, we do have liquidity issues that need to be addressed and maybe some of the asset sales that have been talked about for some time have helped address that situation.

Q: On that accord though, are you feeling more confident because people seem to be wondering what exactly is happening with the sale of their cement assets. They have talked about it for the last couple of quarters but nothing is moving?

A: My confidence is as good as the timeline when the deal concludes. But, essentially to my mind, given the press releases that you saw from some potential acquirers etc in the past, it seems to be a case more on valuation rather than the potential acquirer for the asset. That is something the buyer and seller need to negotiate and come to a common ground over as to what valuation one is agreeable on. To my mind, that appears to be the road block to the conclusion of asset sale.

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Q: The other point on which there seems to be a crisis of confidence is whether or not the management is serious about de-leveraging their balance sheet on that. Do you have any timeline in mind or sense of how it may follow over the next couple of financial years?

A: If you look at their consolidated debt, a large part of the debt comes from Jaiprakash Power Ventures and Jaiprakash Infotech. Infrastructure assets by nature are highly leveraged and almost half of the consolidated debt comes from those entities. These entities are seeing asset commissioned.

In fact, we saw the Yamuna Expressway commissioned this quarter, we saw Bina which is another power project being commissioned. One needs to see those asset ramp ups and start throwing operational cash flows. We have seen the management slow down on incremental capex and become less aggressive on that front compared to their past.

What one needs to see is that the standalone debt, which is also pretty significant. I think the asset sale or some sort of equity dilution, which we saw during this quarter would help reduce their overall debt burden. Otherwise, they can opt for other ways like operational assets ramp ups in terms of the utilisation rates. These are the two ways that I think they can use for addressing their liquidity issues.

Q: What about dilution of equity, is that likely and could that be an overhang on the stock?

A: Essentially, from a minority shareholders’ perspective no one likes to see the dilution. But, the fact is that they did dilute, even if it is a small amount. They did dilute about 3 percent as they announced in their results yesterday. That seems to be the other route if asset sale is something that is not working their way.

Q: What is the annual interest burden for Jaiprakash Associates right now versus the kind of cash flows that they are generating just to see if they are matching?

A: If one looks at Rs 45,000 crore of consolidated debt and if one takes a ballpark of 10 percent which maybe conservative, it will end up with a interest outgo of Rs 4500 crore, some of which would be interest during construction for infrastructure assets. But, they do have about Rs 6000 to 7000 crore of EBITDA corresponding to that. So, what one needs to see is EBITDA ramp up and the operating cash flow ramp ups. I do not think there is interest service issue in the immediate future.

Q: Were you enthused by what you saw from the realty division? Do you think that is something that is sustainable for the company?

A: The standalone realty do not look at the realty piece per se but, it is a challenge to reconcile the volatility in those earnings. If Rs 300 crore suddenly goes up to Rs 600 crore and if you have seen that kind of volatility before also, it does not give me a lot of confidence to build that run rate going forward given the volatility of those earnings. We understand it is to do with the nature of accounting of these assets.

Q: Did you take a look at the numbers of Punj Lloyd or Voltas?

A: I do not cover those stocks.

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