Jaiprakash Associates: Invest for 1-2 years

Jaiprakash Associates Ltd (JAL) has come out with an attractive fixed deposit scheme this festival season. Investors with high risk-appetite and looking for debt avenues have an opportunity to lock into the JAL’s fixed deposits.

These FDs are offering a pre-tax yield of as much as 12.6 per cent (three years). Senior citizens and the shareholders (at least 100 shares) of Jaiprakash Associates get an additional 0.5 percentage point over the coupon rates.

However, investors have to take note that the company offers interest rates that are over 4 percentage points over a normal bank deposit, suggesting that risks involved are high.

Unlike bank FDs, this is a high-risk high-return debt option, especially because of the unsecured and uninsured nature of the instrument and the long-gestation business which the company is engaged in.

The credit rating of JAL’s long-term debt is ‘CARE A+’(this is considered to offer adequate safety for timely servicing of debt obligations), two notches below the best ‘triple A’ rating. JAL is a major player in the infrastructure space with presence in power, cement, engineering and construction, real estate and hospitality.

Cumulative option


While there are a host of fixed deposit options being offered, we recommend that investors consider options for one and two years and also suggest that they invest a small portion of their portfolio in this FD. The minimum deposit in the monthly income scheme is Rs 15,000, while it is Rs 10,000 for the cumulative and quarterly income schemes.

The cumulative option with two-year maturity appears to be the preferred option as it offers good yields. The two year lock-in period makes sure that investors can capitalise on an interest rate uptrend once the deposit matures. In a scenario where the bank deposits are offering interest rates of 7.5 per cent for two years, the two year cumulative option offers to pay on maturity Rs 12,572 for a deposit of Rs 10,000, for which the annualised yield works out 12.12 per cent. The monthly and quarterly payout option offers 11.5 per cent coupon rate per annum. Cumulative option investors may also see their post-tax yield improve if the Direct Taxes Code reduces their effective tax rates. For an individual earning Rs 6 lakh per annum now, the post-tax yield from the two-year cumulative option now works out to just 8.6 per cent as he/she is in the 30 per cent tax bracket. However, if the new tax Code comes into force, the post-tax yield will increase to 11 per cent as he would be in the 10 per cent tax bracket.

Business prospects



JAL has implemented a number of projects in the road and power space and currently has a portfolio of ongoing projects in these segments through special purpose vehicles and subsidiaries. Ganga and Yamuna Expressways being among the prominent orders.

The company has also forayed into real estate and demonstrated encouraging growth signs in this division. While the company has a diversified business profile and the large order book suggests good earnings prospects, a good number of large projects (except for cement) are expected to come up only after three years. Cement may help feed raw material needs of the infrastructure and realty segments. This could perhaps be a reason for the company’s planned capacity addition in the cement segment.

For the year ended March 31, 2009, the company posted a consolidated net profit of Rs 420 crore. FY-2009 has however been a year of muted performance for the company compared with the last five years.

The interest-coverage ratio stood at 1.77, a little stretched as a result of the slowdown last year. While the company’s debt-equity ratio is higher than the industry average, warrant subscription and FCCB conversion, if they happen, can reduce the gearing to a manageable level.

Risks


The new Companies Bill, 2009, which may come into force soon, states that companies will not be allowed to accept public deposits and that the deposits taken have to be returned back to investors within 12 months. This may put pressure on companies to repay deposits before maturity. Therefore, we suggest investors lock into the lesser maturity deposits.