It is not all that bright with Jyoti

Jyoti Structures Limited is an engineering, procurement and construction (EPC) contracting company engaged in power transmission and distribution business.

Jyoti Structures in an Exchange filing informed about its decision to convert a part of its total debt into equity. Further to this, Jyoti Structures will seek shareholder’s permission to enter into a strategic debt restructuring agreement with its lenders to let them convert debt into equity.

Strategic Debt Restructuring (SDR) is a scheme introduced by RBI to help banks recover their loans from the borrowers by taking control of the troubled companies. The scheme is subsequent to Corporate Debt Restructuring (CDR). SDR is significantly an important rescue tool which can be used to ease the financial burden on borrowers. The consortium of 21 lenders led by State Bank of India (SBI) would move with the SDR. Only a part of the total debt of the company will be converted into equity, price of which is yet to be decided, but it would be converted at a value that is not less than its face value.

After taking over the company, Lenders will have 18 months from the date the SDR scheme is effective to find a buyer for the company. If banks fail to usher in a new promoter, the asset would be classified as a non-performing asset for the banks. During the period of control, the new management would deploy professional management to efficiently run and manage these companies and try to revive the loss making assets so as to find a suitable buyer within the stipulated time period.

For the existing shareholders of the company it is better to hold on to the minority interest in an ongoing business, which offers a better potential return than the shareholders would likely to receive in case of an insolvency. But with SDR existing stockholders interest would be massively diluted in the company, as when the number of shares outstanding increases, each existing stockholder will own a smaller, or diluted, percentage of the company, making each share less valuable. Dilution also reduces the value of existing shares by reducing the stock's earnings per share.

Financially the company has been performing poorly since the last past five years, with revenue declining at a brisk pace mainly due to the structural issue ailing the power sector. Company has performed poorly on operational front due to execution bottlenecks and delay in payments from customers. Order backlog as of 31st March 2015 stands at around Rs 4,610 that would mostly lead future revenues provided company is able to timely execute these projects without delay.

Companies total net debt as of 31st March 2015 stands at Rs 2356 crore which is more than 80 times the EBITDA levels. With company’s current total market cap stands at Rs 188.39 crores and current market price (CMP) of Rs 17.10. Further its Book Value stands at Rs 46.44 (31st March 2015) which is 2.71 times of CMP. Even if the company values its business at its Book value it would fetch even less than Rs 600 crores which is less than a quarter its total debt. Company’s debt to equity ratio is at 7.15, which has led to a significant jump in its debt burden. Interest coverage of 0.19 times signifies company’s inability to generate enough cash flow to meet its debt burden. Knowing SDR is considered as a last resort to revive ailing companies which have already undergone a long drawn financial restructuring process. Even after undertaking SDR route company may find it extremely hard to pay of its debt in at least coming coming 5 years. 

Therefore, we advise the existing shareholder to exit the stock given its uncertain future and switch to better performing companies in the same sector. Investors with high risk appetite can continue, however chances of the company coming out this debt trap is very minimal.