W Power 2024

Will F1 Be Jaypee Group's Magic Formula?

The group's 80-year-old founder, Jaiprakash Gaur, has a daring plan to leave a legacy and, in the process, dig out of a mountain of debt. But the ride may be long and tough

Published: Oct 24, 2011 06:22:05 AM IST
Updated: Feb 28, 2014 11:55:35 AM IST
Will F1 Be Jaypee Group's Magic Formula?
Image: Victor Fraile/Corbis

It is 3:30 in the afternoon in the last week of September and hot as hell in Greater Noida. Sameer Gaur is just back in office from the Buddh International Circuit where his company Jaypee Sports International is building India’s first Formula 1 (F1) race track. He orders a Diet Coke. On October 30, the F1 race will take place in India for the first time ever. The who’s who of corporate India, international celebrities and Delhi’s elite will be there. Sameer will have to look his best.

But for now, he sports a stubble, long hair and is dressed in denims. His father, founder of Jaypee Group Jaiprakash Gaur, doesn’t like it. He doesn’t want Sameer to venture out too much in the sun. “It is a big day. He wants me to look my best, but abhi time kahan hain [Where’s the time]? In the past one year, I have lost 10 kg,” he says.

But Sameer is currently dealing with a lot more than weight issues. Getting the race track ready for F1 is just one bit. More important is to fulfil his father’s vision. Sameer, the youngest of three brothers, claims it’s a huge responsibility. And earlier in the day he got a taste of it.

About 12:30 p.m., Gaur senior was on his inspection rounds of the race track — a weekly ritual that has been on for more than six months now, which the man prefers to carry out even at the age of 80 under the blistering sun. Amidst the flurry of construction activity, with an entourage of 10 people, Gaur expressed his displeasure. “Abhi pure ek ghante daant kha kar aye hai… ki yaahan dhul kaise, yeh cheez aise kyon hai [He has scolded us for the last one hour. He was asking us why the track is so dirty and why things are still incomplete],” says Sameer when asked what his father told him.

But Sameer doesn’t mind. The final stages of cleaning the 5.3 km-long track are underway. He claims his dad is obsessed with perfection, but believes the pressure is important to do the task well. It motivates him to work even harder to please his father. “We are on track but when Gaur sahib asks then bas poker face rehna padta hai tab to. All we say is sir, ho jayega, kar rahe hai, kar denge, bilkul [We answer his concern with a poker face and assure him that it will all be done],” says Sameer.

The Man, the Vision

Will F1 Be Jaypee Group's Magic Formula?
 Will F1 Be Jaypee Group's Magic Formula?

Gaur senior has a reason to be so fastidious. The Grand Prix (GP) has to go off without a hitch. It can’t fail. The GP is the first throw of dice that could wipe out the massive debts that the Jaypee Group has accrued over the years. As of date, the three listed Jaypee companies Jaiprakash Power Ventures, Jaypee Associates and Jaypee Infratech have a total debt of over Rs. 40,000 crore and revenues of around Rs. 16,000 crore. Jaypee has already spent around Rs. 2,500 crore on the GP (see table). There is little chance that they will recover this investment. However, the idea is not to make money off the circuit, but off the real estate around it — a cool Rs. 1,50,000 crore over the coming decades if everything goes according to plan.

And the plan — actually it is more of a dream — is to build a city. “He made it very clear in his opening statements that he wanted to create the greatest city in India,” says Peter Ellis who was hired by Jaiprakash Gaur in 2009 to be the architect of that dream. Gaur senior wants to build a city, Jaypee Sports City; an entire city that will carry his name for as long as it lasts. Ellis, 64, was so impressed with Gaur’s vision that he moved to India with his family and his company Peter Ellis New Cities.

The scale is huge. Jaypee city will house 1 million people. The Gaurs will have to construct 2,50,000 houses at least. That’s a huge number; the largest in India. A boulevard will run through the city for over 17 km, in many places almost 300 metres wide. Additionally, the Gaurs have plans to build a cricket and a hockey stadium, create a school district, health system, public transportation company and their own security group.

Will F1 Be Jaypee Group's Magic Formula?
But a city needs a clear economic purpose, a big draw if you will, if it hasn’t grown organically, like Mumbai or New York or London. So Las Vegas and Macau centre around casinos. Hong Kong and Singapore centre around finance. But this is the first time somebody is building a city around sports. Even the Gaurs hadn’t thought on these lines earlier.

Till 2007, Sameer Gaur had no idea about F1. While they were constructing the Yamuna Expressway, Jaypee were toying with the idea of a night safari to create value out of its land bank. It was soon replaced by F1, and for some very good reasons.

Will F1 Be Jaypee Group's Magic Formula?
Image: Amit Verma
Sameer Gaur, MD, Jaypee Sports International

Formula 1 is a heady mixture of speed and glamour that attracts the hip and the rich. “You’ve put it on the map. A Formula 1 track can create real estate value next to it. Lady Gaga comes and sings. You’ve created a buzz,” says Ellis. At the inaugural Singapore GP in 2008, 40,000 out of the 100,000 fans at the venue were foreigners. Indian visitors to Singapore were among the highest spenders averaging SG$ 1,250 for a five-and-a-half day trip.

So, when the Gaurs came to know that the folks from F1 were scouting for a venue in India and when the family sat down to discuss the potential of an F1 circuit in India, Gaur senior was bowled over. “He said, ‘humein karna hi chahiye [we must do it],’” says Sameer.

Herman Tilke, who’s designed F1 circuits in Malaysia and Bahrain, was in India looking for a venue. Sameer arranged for a meeting at Greater Noida at the Jaypee Greens Golf course. “We showed him that this is what Jaypee can do and we have already made this and that. Then we showed him the land in and around and the connectivity to Delhi,” adds Sameer. Tilke was convinced. He, in turn, pitched the company to F1 supremo Bernie Ecclestone.

In 2008, Sameer went to London with a battery of lawyers to sign the contract with the Fédération Internationale de l’Automobile (FIA). “The Formula 1 contract is very, very stringent and my lawyers were telling me yeh change karna hai, yeh theek nahi hai [This has to be changed, this is not right] and Jaiprakash Gaur told me, ‘Just sign the contract. Don’t listen to your lawyers’. He knows the importance of getting such a big event to the country. And if you listen to your lawyers then baat kharab [ho jaati hain] [things will not work] and that is what I think Mr. Ecclestone appreciated,” says Sameer.

A Few Hasty Moves
Ecclestone usually deals with heads of state when he wants to get F1 into a country. He is a ruthless negotiator. “The 2008 Formula 1 Singtel Singapore GP marked the culmination of more than a decade of discussion between Mr. Ong Beng Seng and Mr. Bernie Ecclestone of Formula One Management,” says Colin Syn, deputy chairman, Singapore GP Pte.

In their need for speed, have the Gaurs ended up paying too much? In the entire F1 ecosystem the one guy who always makes money is Ecclestone. In gambling parlance, he is the House! The reason for that is his hard negotiating skills. Perhaps, if the Gaurs had been a bit more patient, they could have negotiated for a lesser hosting fee. They are reportedly paying $40 million a year and that will increase by 10 percent every year. Tavo Hellmund and Red McCombs, owners of the Austin GP in Texas, USA, which will debut next year, are paying $25 million a year for 10 years.

The Gaurs may have also missed an opportunity to work with the government. F1 is not recognised as a sport in India and the Gaurs have not received any government concessions. There is little doubt that the Indian GP will be a sell-out. But, while the Jaypee Group does all the hard work, the government will be earning a lot through taxes and tourism. “F1 can dazzle you and make you forget about political sensitivities. F1 gets people to your country, but it seems that the Indian organisers were in a rush to land the contract,” says Chris Aylett, CEO, Motorsport Industry Association.
To be fair though, the present government has more pressing matters to worry about.

Bravado versus Reality
On the face of it, the Gaurs are not bothered. Right now, the whole organisation is working arduous hours to make the three days of F1 a success. Fact is, even if they lose a billion dollars over the next 10 years on F1, it is chump change compared to the money they stand to make through their real estate sales. Think of F1 as a really expensive advertisement campaign. The Gaurs have around 5,000 acres around the circuit and the Yamuna Expressway. The land was part of the Expressway contract deal with the UP government. An NDTV report says the land was sold to Jaypee at Rs. 1,220 per square metre. The rate now is Rs. 18,000 a square metre.

F1 is not the only real estate play though. After the GP, the Gaurs want to build a cricket stadium with a capacity of 100,000 and a hockey stadium that can seat 25,000. Again, the capital costs here are huge, but the benefits outweigh the risks. Jaiprakash Gaur is counting on the growing middle class in India and their aspirations to fulfil his dream. “Consider this. Noida grew to a population of one million in 15 years. And that was before the boom in the middle class,” says Ellis. “If India continues to grow at the current rate, Greater Noida should see a million people much quicker.”  

For a city to come up so quickly there has to be huge commercial interest in the region. There are early birds like Honda, Samsung and LG who have set up operations. But then as far as the National Capital Region is concerned, companies still prefer to set shop in Gurgaon or Noida.

This is the way things stand right now: The potential is there, so is the land; the advertisement in all probability will be a hit, but a huge hurdle for the Gaurs could be their debt. Manoj Gaur, the eldest son and chairman of Jaypee Associates, told CNBC-TV 18 a couple of months ago that the group wanted to reduce this debt by Rs. 15,000 crore.

That’s easier said than done. “Debt is the biggest concern, especially in this kind of environment. If you are in a lot of debt, then how are you going to implement your capex [capital expenditure] plans? From the looks of it, they will be free-cash-flow negative for the next 10 years,” says an analyst with a leading brokerage firm who’s been tracking the Jaypee Group for several years.

“They carry a huge amount of debt in the power business and if they don’t manage to do an equity issue by March 2012, they won’t have enough money to survive. It’s difficult to say if markets will recover by that time,” he adds.

The group has diversified into unrelated businesses. They bought a fertiliser business a couple of years ago that didn’t tie with any of their existing businesses. They had bid for a port project. Their cement business will also come under pressure because the sector is on a cyclical downturn.

The real estate business in India is also under pressure today. “This is a good play by the group if they have the money,” says Sachin Sandhir, managing director, Royal Institute of Chartered Surveyors, South Asia. “But most real estate developers are short on cash and residential projects are typically funded by customer advances. There are serious concerns on developers’ ability to build and deliver on time, and also to repay lenders on time,” he adds.

The real estate market is a lot more volatile today. Prices typically used to run up for five to six years before a slowdown. Completing a project took the same time for a developer. If the developer was good, he could buy land at the bottom and sell on an upward curve. Now that whole cycle takes 12-18 months. And that is not enough time for developers to operate. To make matters worse, funding has dried up. “Customer advances have run out. Developers are borrowing from markets at high rates and the impact of all of this is seen in the slow progress on sites,” adds Sandhir.

However, analyst reports from Citi, ICICI Direct and Morgan Stanley give a thumbs up to the Jaypee Group. All the three recommend a ‘buy’ on Jaypee stocks because of the land bank the group is sitting on. Even if they are forced to sell off land parcels to other developers because they do not have sufficient funds to develop the land, the Gaurs will make quite a lot of money.

According to Ellis, the Gaurs are constructing all the buildings at Sports City at the present time. His company is designing 8,000 housing units and several million square feet of commercial space. It is also designing the parks and urban infrastructure. The first family housing project is under construction and around 60 acres of plotted development have already been sold to customers.

“The company that has these sort of plans has to have tremendous staying power and I guess that they do. I know they won’t build a neighbourhood unless a majority of units are sold in advance so they don’t get ahead of themselves, but they still have a massive investment of infrastructure. Speed of sales is an issue, clearly, and no one today knows the answer as to how that’s going to go,” he says.

For now, the Gaurs have the pole position. The chequered flag of Gaur senior’s dream? That’s some way off.

SAMEER GAUR & THE KALMADI ISSUE 

In June 2007, Suresh Kalmadi announced that India will host Formula 1 under the Indian Olympic Association’s umbrella with the Central government’s support. Instead within months, his son Sumeer picked up a 13 percent stake in JPSK, a private entity formed to construct the circuit with Jaypee as the majority stakeholder. According to media reports, Kalmadi’s daughter and son-in-law, Payal and Aditya Bhartia, were also appointed as directors of JPSK. 2,500 acres were acquired for this from the UP government, earlier earmarked for an SEZ; 60 percent of the land could be used for real estate development. Questions have been asked if this was another plan by Kalmadi to make private gains. Kalmadi is now in jail, facing charges of corruption related to the Delhi Commonwealth Games. 

Q: What’s with Suresh Kalmadi and F1?
Sumeer Kalmadi, son of Suresh Kalmadi, has always been a friend and is still a friend and in the beginning one doesn’t know why Mr. Suresh Kalmadi [stops]… and CWG is nowhere connected to Formula 1. But yes, I always said that the entire family always knew Mr. Suresh Kalmadi. When we had heard the story that yes we can get Formula 1, I defi nitely contacted Sumeer and said ki aisa hai [this has happened]. 

Q: So what happened after that?
Let me confirm it to you. And you know Formula 1 discussions also happened in Hyderabad with Mr. Chandrababu Naidu. Formula 1 discussion also happened in Kolkata. The Hyderabad case is similar to the IOA case. Dono drop ho gaye to hamare paas rebound mein aya. Ki theek hai saab yeh kar lete hai. [When both Hyderabad and Kolkata didn’t work out, then it came to us and we decided to do it.] 

Q: So was Sumeer involved after that?
Well, at that point of time, to do this kind of development and Sumeer and we were all friends so we said let’s do a joint sort of thing but karne ke baad [after the partnership] we realised and we had two partners at that time, Sundar Moolchandani and Sumeer Kalmadi, but after that the kind of investment that was required was huge and our understanding was very, very clear that ultimately it is a business and people who are there have to equally participate. Much before anything of CWG was in the air, a mutual decision was taken to call off the partnership and the entire project was taken by Jaypee Group as its own baby. 


(This story appears in the 04 November, 2011 issue of Forbes India. To visit our Archives, click here.)

Post Your Comment
Required
Required, will not be published
All comments are moderated
  • Sudeep Nigam

    Well, i have been watching jaypee group closely since it acquired the land in the satellite town of noida, and it is actually all because of the political support provided to the Jaypee Grp. But their do exisits a huge potential in their city, because they are interested in buying out a team in the cash rich Indian Premier League which could provide them with constant cash support and not only this the Taj international airport which is again expected to be built by Jaypee group and GMR in the vincity is going to help a lot to them.

    on Mar 7, 2012
  • Aj

    Ha..it's a hogwash & all about the glamour mktg. of land..loads of foreign CEO's have been hired by grand "visionaries" of Indian real estate players to use them as showpiece at meetings..end piece about land award reeks of scam..anyways, am curious as to how anyone can dig himself out of mountain of anything??won't digging lead to more mountain of earth/ dirt..just a thought to ponder upon..

    on Oct 24, 2011