JP Associates has defaulted, rating cut shows cash flow mismatch: Swati Agrawal, Care Ratings

In a chat with ET Now, Swati Agrawal, Regional Head, Care Ratings, talks about the rating downgrade for JP Associates. Excerpts:

ET Now: Your rating rationale for JP Associates?

Swati Agrawal: JP Associates has gone through a series of expansions in various sectors — real estate, cement, engineering, roads, power, etc. The economic environment as well as delays in their monetisation programme have led to some kind of cash flow mismatches. The revision in the rating is a reflection of that.

They have missed certain interest-free payments. We would have liked them to make these payments timely. The downgrade in ratings reflects their failure to do so.

ET Now: Could it be the lowest rating for them? What are the implications of this downgrade on the banking system?

Swati Agrawal: This is a default rating. De-rating essentially is the lowest of the band. I have already mentioned that payments have not been made on time.

I would like to remind you here that rating agencies closely look at timely repayments. If a company has missed them, then rating agencies have to take the necessary action. That means a default rating.

JP Associates' exposure stands at Rs 40,000 crore. The overall group exposure is Rs 60,000 crore. This downgrade is primarily for Jaiprakash Associates.

ET Now: It is one of the groups to have gone in for a divestment drive in order to push deleverage. But perhaps the leverage is so high that it is becoming difficult. Your take?

Swati Agrawal: The traditional sectors always have leverages. Power, steel, cement — all of them have leverage issues. To that extent, it is basically about how a company manages the cash flow.

A company may take various steps to manage its cash flows. It could mean getting in equity, it could mean getting in QIPs, it could mean monetisation of assets. In many instances, there are cash flow mismatches. The steps aimed at monetisation and cash flow prop-up do not yield the desired results. In such cases, the rating of that company naturally gets impacted.

ET Now: Banks have big exposure to this particular account. In your view, have banks already termed JP Associates as an NPA, or is it yet to be done?

Swati Agrawal: According to the information available with us, we do not think it has been termed an NPA. True, the company is going through a stressful period. There have been liquidity mismatches. But that is that. It has not yet turned into an NPA.

ET Now: Do you see similar stress when it comes to other infra or steel or cement players?

Swati Agrawal: Yes, quite a few companies are under stress as of now. Over the last one or two years, there have been downgrades in infrastructure, power and steel sectors, which is a reflection of this stress.

This situation has much to do with both the economic environment and the debt-laden expansions. It was expected. This is what has led to repayment liabilities.

ET Now: Is there any possibility that JP Associates could default?

Swati Agrawal: Going by rating agency parlance, it has already defaulted as it has failed to make the payment on the due date. However, the banking system defines default differently. Banks look at whether or not a company has become an NPA.