Jaiprakash Associates Ltd

Company sells-off shares to take advantage of the big rally in stock market & prune debt
It seems to be the flavour of the season. A week after Reliance Industries, infrastructure company Jaiprakash Associates Ltd (JAL) followed in selling treasury stock that it had got when it merged Jaypee Cements, and other subsidiaries, with itself. Jaiprakash raised around Rs 1,190 cr from the sale of 5 cr treasury shares in bulk deals last week. This was the second such sale of treasury shares for the company, which sold 2.5 cr shares on June 18 at Rs 200 a share to raise Rs 500 cr. JAL shares closed 6.34% lower last Wednesday (when the shares were sold) to close at Rs 234.15, against a decline of 1% in the Sensex. The company sold shares at an average price of Rs 238.50 a share. JAL has got no forex exposure that can be adversely affected due to the global meltdown. Its series III foreign currency convertible bonds (FCCBs) issued in 2007 are due for conversation only in 2012.

A merger of four subsidiaries with JAL early this year resulted in the formation of around 21 cr treasury shares or 14.5% of the equity capital of the combined entity. Treasury shares are those issued to the parent company in lieu of the stake it holds in its subsidiaries. Since the parent company can’t hold its own shares, these treasury shares are being held by four trusts created for the purpose. JAL merged with itself Jaypee Hotels, Jaypee Cement, Gujarat Anjan Cement and Jaiprakash Enterprises.

The Delhi-based company, which is the flagship of Jaypee Group is an infrastructure player with operations in cement and cement production, engineering & construction, power, hospitality and real estate, went in for the share sell-off to take advantage of the big rally in the stock market and use it as an opportunity to prune debt, feel experts.

According to Amitabh Chakraborty, president (equity), Religare Capital Markets, selling treasury stocks is one of the ways to raise funds. Since equity market has rallied substantially, companies are enchasing on this opportunity.

The companies which had accumulated record amounts of debt during boomtime for expansion projects, now have little choice but to raise funds. In fact, Indian companies have raised record funds by selling shares to institutional investors this year, after Sebi relaxed pricing rules. About 26 companies so far, have raised Rs 17,800 cr by selling shares or convertible securities to institutional investors this year, according to Bloomberg data.

The move by Jaiprakash to raise funds is a bid to finance its proposed captive power plants and keep cash ready for a possible acquisitions or for setting up of cement capacity in Maharashtra and overseas, a top company executive said. “The funds raised will be used to finance our proposed 360 MW captive power plants and add more cement capacity,” said JAL executive chairman Manoj Gaur, adding that they will not go towards debt repayment. JAL has a total debt of Rs 9,500 cr and a debt-equity ratio of 1:9, as of now. The company has no plans to sell any more treasury shares in the next three months.

Experts feel that as the market improves, the company will continue to sell treasury shares in phases to fund its projects that include cement plants and expressways. The proceeds of the first round of treasury share sale was slated to finance the Formula 1 track in Greater Noida, a cement plant in Andhra Pradesh and Yamuna Expressway between Noida and Agra.

Jaiprakash Associates has also recently raised Rs 1,000 cr through an issue of five-year non-convertible debentures (NCDs) to Standard Chartered India at a coupon rate of 11.5%.

Buyback & how it’s done

THE TERM literally refers to a company’s move to repurchase its own shares. By doing so, the company reduces the number of its shares available in the open market.

This will lead to the rise of earnings per share (EPS) and the return on assets of the company, indicators on the balance sheet of an improvement in the performance of the company. As an investor, it will mean an increase in his/her stake in the company. A stock buyback is also sometimes referred to as share purchase and it is generally considered to signal a potential increase in share price.

How is it done?

A company can buy back shares either using tender offer or in an open market buyback. Under the first method, the company issues a tender offer with details regarding the number of shares that the company plans to repurchase and indicates their price range.

An investor keen on accepting the offer needs to fill the form mentioning the number of shares that he/she wants to tender and the price desired and send it back to the company. In most cases, the price in a tender offer buyback is higher than the price in the open market.

According to Sebi guidelines, if the company has decided to accept your shares, then it needs to intimate you in 15 days after the closure of the offer. The other route available for company is where they slowly buy back their shares from the open market.

Where can you find out?

Details regarding buybacks are available from the stock exchange as it is mandatory for the companies to intimate them of such resolutions. Details of a buyback offer are also available on the Sebi website.

Why are companies currently going for a buyback?

There are multiple reasons. Sometimes, companies generally indulge in a buyback when they feel that their share price in the market has fallen drastically.

At other times, it may simply be a way of using excess cash. However, there are also cases when this may be an attempt at preventing a takeover of the company.

India Inc lines up $17-billion IPOs

THERE is always a lull before the storm. After a rather dull first eight months of 2008, the Indian capital markets are headed for a stormy session ahead. What’s in store for the last four months is more than thrice the amount of proceeds raised during the first eight months.

In fact, Indian companies are lined up to raise an estimated $17 bn from 56 public issues during the last four months of 2008, according to Thomson Reuters estimates.

Merchant bankers in India don’t rule out a possible IPO bubble burst, considering the huge amount of IPOs in the pipeline. Till now, companies have deferred their issues due to valuation concerns. They have been waiting in the hope that market sentiments will rationalise sooner rather than later. Now, they are slowly but surely resigning to the fate and starting to move ahead with the fund raising process, as there are genuine capital requirements, which cannot be put on hold beyond a certain timeline.

Analysts worry that the stampede, which is most likely to emerge in the last four months of 2008, would make it a difficult market for merchant bankers to complete deals. Probably, they’ll work on selective deals and after a hard look at what can sell in this market decide on the course of action. It will also be interesting to see whether the entire system is actually ready to manage the IPO rush, especially when too many competing deals will be flooding to be get done at the same time.

This follows the Securities & Exchange Board of India (Sebi) recently kicking off primary market reforms by amending the rules on collection of IPO money. As per the new guidelines, retail investors’ money will remain in their bank accounts till allotment. Also, it recently reduced the duration for a rights issue from 109 days to 43 days.

State-owned companies such as NHPC (Rs 1,670 crore), and Oil India Ltd (OIL Rs 1,400 crore) have already made their intentions clear by filing applications with the Sebi and are expected to set the tone for private companies to follow suit. Another state-run company, RITES (Rs 350 crore) has already got a SEBI approval for its public issue

This is the best time for the government to take the lead to revive the primary market. Divestments and offerings from PSUs at attractive prices can pull back investors easily. Once the momentum starts, the sentiments would improve. We have seen this happen in the past; it can happen again.

Capital markets to improve

WITH credentials not under question and with the right pricing, PSU IPOs can become the harbinger of good markets. The capital markets will only improve from here on. We expect the situation to improve significantly over the next twelve months. We, in fact, are already getting there. Earlier this year companies such as Wockhardt Hospitals and Emaar MGF had withdrawn their public offerings due to a lukewarm response. Surprisingly, despite the slowdown, India still managed to occupy the fifth slot in the $87-bn global IPO market, raising $4.3 bn from 32 deals so far this year. On the other hand, China ranks second, raising $15.6 billion from 94 IPOs.