Jai Balaji Industries: Back from brink of bankruptcy, but can it be a revival bet?

What’s the scene: Once upon a time as many as 42 companies vowed to put up 1MTPA steel plants, but only two succeeded. One of them, Jai Balaji Industries, created a record, by putting up an integrated steel plant in just 42 months against average required time of 48 months.

They put it up at a cost of Rs 2,500 crore against the then prevailing average of Rs 4,000 crore. Coal blocks worth Rs 14,000 crore were allocated to them for their massive upcoming expansion plans. Even their Ductile iron plant, which they set up later, would be next to only Tata Metaliks (the benchmark creator in the industry) in terms of setting up costs and efficiency.

What happened next: After becoming a 1MTPA company from being a 1 lakh tonne firm in 42 months, Jai Balajibecame more ambitious. It embarked upon a plan to set up a 5 million tonnes steel plant along with a 1,215 MW power plant at Purulia, West Bengal.

What went wrong: A change of government in West Bengal during 2010-11 turned things topsy-turvy. Coal blocks got deallocated, taking away the rich backward integration story. The firm became crazily leveraged and that took a toll. With a rise in raw material costs, little capacity utilisation and the debt trap, the company was left on the brink of bankruptcy. All of its lenders sold the debt exposure of Rs 3,000 crore to Edelweiss ARC and Omkara.

What’s the situation now: The company was 99.9% gone, but somehow survived being taken to the NCLT. The promoters get full credit for that pulling off that miracle. They are fierce negotiators and have been able to balance the working capital cycle over the past few quarters. Last year’s over Rs 250 crore operating cash flow is a vindication of that fact.

As the market sits amid a favourable steel cycle, the company has started showing signs of revival. Their net asset value (NAV) should soon be way superior than the current market-cap.

The current benchmark for an integrated 1.2MTPA plant with railway slidings and ductile iron pipe would be well over Rs 7,500-7,750 crore. Thus, the Rs 7,500 crore replacement cost of assets minus Rs 3,000 crore odd debt gives a Rs 4,500 crore kind of NAV. The current market cap is just Rs 500 crore. That makes it look like the stock is quoting at a massive discount.

What can the management do now: The company is having a yearly sales run rate of Rs 3,000 crore. From a 99.9% bankruptcy risk, there’s now 30% chances of survival. In the past, the company’s promoters were excessively ambitious.

They may have to curtail their earlier dream of turning the venture into a 6-8MTPA company and focus on deleveraging. The steel cycle is on an upswing and most players are planning to expand capacity. If they follow on that path, it would be like risking death.

The need of the hour is to reduce debt as much as possible with the rich operating cash flows that they should be making, as the tailwind keeps blowing.

(DISCLAIMER - The writers are individual investors. They along with their family members may have position in the companies discussed above. This writeup is for information and educational purposes and is not an investment advice. Please consult your investment adviser (in case you plan to invest) who will be able to guide you better based on your risk profile.)