The curious case of Jaybharat Textiles

Jaybharat Textiles & Real Estate, a textile company that forayed into real estate three years back, today has a market capitalisation higher than Grasim Industries or Tata Motors.

The company, promoted by the Mumbai-based Tayal group, has a market cap of Rs 13,108 crore {Rs 131.08 billion (market cap rank: 45)} with its share price moving up 2.58 times in the last three months - in a falling market. The scrip moved up from Rs 198.75 on October 30, 2008, to Rs 488 on February 2.

In fact, on January 23, Jaybharat had a market cap of Rs 15,960 crore (Rs 159.6 billion), more than the market cap of Tata Steel or Maruti Suzuki that day. What explains the stock's rise? The Tayals say there's a real estate story.

Jaybharat earns all its revenues and profits from textiles but has big plans in real estate. It wants to develop 1,125 acres of land across 31 cities, adding 4 to 5 million sq ft of space every year, said group patriarch Praveen Kumar Tayal.

The group has a history of controversies with PK Tayal at the centre of the Bank of Rajasthan scam five years ago, though his name was cleared.

"We have a low-cost land bank and our real estate projects are debt-free… some investors may feel positive about it. My average cost of land is Rs 6 per sq ft. We have been buying sick textile mills over the last 20 years," said Tayal.

In fact, the scrip started moving up from mid-November, when the Tayal family signed joint ventures with National Textile Corporation to develop 11 NTC mills. The group has signed joint ventures with NTC through three companies - Jaybharat, KSL & Industries and Eskay Knit (India).

But real estate analysts are not impressed; in fact, none of them had even heard of Jaybharat's real estate story. They say the land bank story is dead and nobody will buy it today. The sales head of a leading brokerage said the Tayals had tried to sell a similar story in KSL & Industries.

In fact, analysts say that neither real estate nor textile is doing well, and there's no reason Jaybharat should get a premium over other real estate stocks.

"The valuation defies logic. If you look at volumes (two-week average volume as on Friday was 12,272 shares), the stock appears to be manipulated," said analyst Arun Kejriwal of research firm Kejriwal Research & Investment Services.

Though the public owns 31.54 per cent of Jaybharat's shares, 28.24 per cent of this is held by 20 shareholders holding shares worth Rs 100,000 or more. Promoters hold 69.5 per cent. Neither FIIs nor mutual funds hold any stock.

Analysts suspect circular trading in the stock, where shares are typically traded among a few people. This is reflected in the percentage of shares being delivered against the number of shares being traded. In the last three months, only 16 per cent of Jaybharat shares traded were delivered.

Analysts say the lower the delivery of shares in a counter, the more is the speculation. If the delivery is 60-70 per cent, there's less manipulation. But if only 20-30 per cent of shares traded are being delivered, the trading is more likely to be speculation.

"I am also surprised. We have not bought a single share in the last six months nor pledged any shares," said PK Tayal. His son Saurabh Tayal is chairman of the Tayal Group.

The promoters, group firms or their associates have been pulled up by Sebi a few times. In September 2007, Sebi had banned five firms and one individual, all associates, from trading in KSL & Industries and Jaybharat Textiles.

But even if Tayal has the land, how does he plan to finance his projects? "We don't want to raise any debt. We will fund our projects from the rents that we will generate and will go for rent discounting, if necessary," said Tayal.

He plans to commission 4 to 5 million sq ft of projects in 2009 in places like Nagpur, Navi Mumbai, Dombivili and Vapi. This will provide him the rental income. His mantra in real estate: buy land cheap, don't leverage, and hold the real estate as long as you can. So, while he will sell residential buildings and small offices, he plans to retain all his commercial real estate, and rent it out.

Tayal claims his cost of construction is around Rs 1,000 per sq ft, which more or less matches his rental income of Rs 70 to Rs 80 per sq ft a month, or Rs 840-960 per sq ft a year.

So he says rentals of 4 million sq ft in the first year would generate Rs 400 crore, which will pay for the construction in subsequent years. Tayal says he has funded the construction through internal accruals. "Real estate is not a two-year business but a ten-year business," he said.

Jaybharat's first project, the 1.2 million sq ft Vapi City Centre will be completed by March 2009.

With inputs from Deepak Korgaonkar