Restructuring of Jaiprakash Associates

Jaiprakash Associates (JPA), flagship listed arm of Jaypee Group is acquiring four companies and merging into it. Let us have a look to the scheme:-- i) Jaypee Hotels (JPH), a listed company, in which JPA is holding72.18% stake is being merged with JPA on share swap ratio of 1 share of JPA of Rs.2 each, for every 1 hare held in JPH, of Rs.10 each. The present paid up equity of JPH is at Rs.55.49 crores. So 15.44 crore shares of Rs.2 each of JPA would get issued to non-promoter shareholders of JPH and 40.05 crores shares would get parked in Trust, for promoters stake.



ii) Jaypee Cement Ltd (JPC) a 100% subsidiary of JPA, having paid up equity of Rs.355.95 crore is being merged on swap ratio of 1 shares of Rs.2 each of JPA, for every 10 shares of Rs.10 each, held in JPC. So, 355.95 lakh shares of JPA would get issued and shall be held in Trust.



iii) Gujarat Anjan Cement Ltd. (GAC) a 99.88% subsidiary of JPC having paid up of equity of Rs.333.95 crores, is being merged on a share swap ratio of 1 share of Rs.2 each of JPA for every 11 shares of Rs.10 each, held in GAC. So, 303.24 lakh shares of JPA shall be held in Trust and 0.35 lakh shares shall be issued to Non-promoter shareholders.



iv) Jaiprakash Enterprises Ltd (JEL) is engaged in infrastructure and property business with majority of its stake being held by the promoters of JPA in their personal capacity. No financial details of JEL is available, except that 3 shares of JPA of Rs.2 each shall be issued for every 1 share of Rs.10 each held in JEL. The present paid up equity of JEL is reported to be Rs.33 crores, being 3.30 crore equity shares of Rs.10 each. So, 9.90 crore shares of JPA shall be issued to JEL shareholders.



Now let us have a look to some other key features:--

a) JPA is not holding even a single share of JEL while JEL, is holding 801.98 lakh shares in JPA, being 6.83% of total issued capital of JPA, as part of promoters equity.

b) Paid up equity of JPA, as at 30-09-08, is consisting of 117.38 crore equity shares, of Rs.2 each, being Rs.234.76 crore as paid up equity. Of this, promoters stake is at 52.16 crore shares being 44.44% stake.

c) On acquisition of four companies by JPA, as stated hereinabove, 22.04 crore shares of JPA for Rs.44.08 crores would be issued, due to which, paid up equity of JPA would rise from Rs.234.76 crores to Rs.278.84 crores.

d) Of 22.04 crore new shares of JPA being issued, 10.60 crore shares would get parked in Trust, as Treasury stock while 11.44 crore shares would get issued to non-JPA shareholders. Of this 11.44 crore shares, about 9.90 crore shares being issued to JPE shareholders, is presumed to be coming to the promoters of JPA viz. Gaur family.

e) Equity dilution of JPA would be about 15.80% from Rs.234.76 crores to Rs.278.84 crores. Of this, 7.60%, would get parked in Trust while about 8.20% would get issued to non-JPA shareholders.

f) Of expanded equity of Rs.278.84 crores of JPA, promoters would be holding about Rs.124.12 crores (62.06 crore shares of Rs.2 each being 52.16 crore share held presently and 9.90 crore shares to be received on swap of JPE) which would be 44.51%. So, present stake of 44.44% in JPA would remain almost at same level at 44.51%. In addition to this, 7.60% would be held in Trust, which implies a holding of 52.11% by promoters, in JPA.

g) JPE got a valuation of about Rs.860 crores, if we multiply 9.90 crore shares to be issued by JPA for acquiring JPE with closing price of JPA of Rs.87, on 22-12-08. Though no financials of JPE is available, it is estimated that its PAT for FY 08 was at Rs.35 crores and a multiple of 25 times has been given for acquiring JPE. Promoters of JPA have valued the assets of JPE at around Rs.9,000 crores. It may not be correct to value JPE purely on earnings method, as some of its realty assets though may be having huge value may not be yielding any income. This would constitute about 7% of the total assets of JPA, post acquisition of four companies.



So it can be said that though valuation of JPH, JPC, and GAC seems to be correct, one may raise doubt on valuations of JPE. But we are not having any apprehensions or concerns on the valuations of JPE.



However, one needs to consider the rationale or objective behind this move of consolidation? We feel that cement, realty (including hotel) and construction having come under one umbrella viz JPA, we may see next round of restructuring in JPA with hiving off of cement business into a separate company, in which, strategic investor may get inducted at a later date. Presently, JPA has a capacity of 8 million TPA of cement, which is being increased to 24 million tonnes by end of calendar year 2009. So, JPA would be requiring another Rs.2,500 crores to complete this capex. Though JPA had issued 5 crore warrants in the past, to Jaypee Ventures, one of the promoter, at Rs.397 per share, but one needs to see the fate of these warrants. On consolidated basis, JPA has a debt of Rs.11,500 crores, on a net worth of Rs.5,000 crores as at 31-03-08. So, promoters need to look for alternatives to raise funds for cement expansion.



Coming on the other business of JPA, its infra projects need huge fund requirements. 160 km. long 6 lane Taj Expressway Project and 1,047 km. long 8 lane Ganga Expressway Project along with development of land parcels adjacent to Expressway projects are some of the big projects. In addition to this, huge hydro power capacity is being created. Since, JPA holds about 63% stake of J. P. Hydro Power, all funding for these projects have to be provided for, by JPA.



So maybe, to raise huge capex requirements of over Rs.12,000 crores one flagship is being created by Jaypee Group to expeditiously implement these projects. It seems that Jaypee Group would be able to succeed in its plan and this merger move may prove to be timely and result-oriented.