Date: 11th July 2000
Jaiprakash Industries Ltd. - The thin line between Jai and Parajay
Current market price - Rs52.4
BSE Sensex - 4898

Have you ever wondered why such dangerous sports like Formula One have such large fan followings? Or why ostensibly sane humans jump into the ocean to find out whether the extreme right tooth on the right half of the upper jaw of the Great Blue Whale is canine or molar? Well we found it out. Risk and the flight against Risk. In the case of F1, the aim would be to come home for dinner and in the latter not to become dinner. In your case, we suggest that you forget all these and go for Jaiprakash Industries Ltd (JIL) - your dinner might be assured for years to come.

What is the Business?
JIL has three divisions namely engineering and construction, power and cement. And the fourth is the hotel division, making up the palette. In cement, JIL owns three plants - all in Madhya Pradesh - with a combined capacity of 4.2 metric tons (mt). Cement contributes towards 36% of JIL's turnover (FY99). But, the present scheme of things could see a change in the future due to a restructuring plan. The proposed hive-off of its 100% subsidiary, Bela Cement Ltd which accounts for 2.5mt, would leave JIL with the lucrative Engineering division (contributing 63% of turnover FY99) and Power. On the engineering and construction side, JIL has the expertise in constructing dams and hydro power with projects like Natpha Jhakre power project (HP) and Indra Sagar project (MP) in hand. So where is the risk we were talking about? The company remains an enigma. It started in the construction industry, diversified into steel and power, got into hotels, locked horns with the cement majors …and finally life has come a full circle. With cement expected to become a minor player in JIL's portfolio, power remaining an also ran and no mention being made of steel and hotels, the company's fortune will depend wholly on the Engineering division. And with almost every project embarked upon dogged by controversies (Sardar Sarovar, Tehri Dam, for instance), hinging solely on these, as future sources of income could be risky. However, the company claims to have order book positions in the engineering division, to the tune of Rs60bn (annual report of FY99) and if they do happen, the restructured JIL might be a company to watch for.

Who is the Management?
The management is a complex and intricate amalgam of all the members in the family - the father, the sons and son-in-law, the daughter, the nephew, the confidantes and others. In fact, family potboilers have been routine affairs, remaining well chronicled over the years. (Okay! Their personal affairs you cry). True. However, the family and their fiefdom (sorry! the management and the company) are known more for stock market imbroglios and price riggings than anything else. What would perhaps interest you more is that JIL has never paid dividends and the company's operating margins have shown a declining trend since the past four years from 35% in FY96 to 25% in FY99. The lackadaisical attitude is, perhaps, also evident from their decision to float a Rs6bn integrated complex. That when they are already burdened with a roughly Rs10bn debt and a Rs2bn debt servicing bill. The risk - the leopard will not change its spots. The possible payoff - none.

Whither Cash flows?
Cash flow has never been one of the stronger armours of JIL. A fluctuating working capital balance ranging from Rs1.05bn in FY97 to (-Rs566mn) two years hence does make one wonder about its war chest. However, the hiving-off of its cement divisions will be the silver lining. The hive off and the consequent sale of a stake will bring in roughly Rs4bn which can go to reduce debt and free JIL from the consequent debt servicing. Good move, especially considering that MP (where the cement plant is located) is a cement surplus state. And when we think that all's well that end's well, Mr. Gaur comes up with a plan to set up a Rs6bn integrated complex containing hotels, residential and commercial areas and golf courses. (Oh! We forgot the health clubs). The risk - source of cash. The payback - dim.

Why should I Buy?
The market blessings! For any fataka stock, there cannot be a greater boon. Notwithstanding this, the inherent strength of a fataka is the ability to use its risks to entice the investor. And JIL is blessed with both. Finally, the high liquidity in the market and the combination is set. Okay, on a fundamental platform, JIL does have silver lining, if anything comes out of the proposed reconstruction plans. If plans to reduce the debt burden by selling stake in Bela Cement do materialize, JIL could provide a fillip to its bottomline by saving on interest charges. This accompanied by a concentrated focus on engineering and construction will make this stock attractive, fundamentally, and not only for its gyrations. Track this scrip (trading at a P/E of 36x), keep it on the periscope, but do not let it obsess you. Hitch-hike on it, make your manna and exit. And when do you get in? We will tell you. After all what are we here for?

Where can I go Wrong?
The tainted perception of the company, the cashflows, the lack of public information, a family run company - all make JIL a virtual quicksand. With the cement division on the block, it is left to the engineering division to reap the profits (in case we overlooked, the power division is expected to generate profits only after a few years). And if the orders mentioned by the company does not materialize, the wind will be blown out of the JIL sail.

Bala Gopal Menon

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