Published on 13/02/2020 2:40:42 PM | Source: Emkay Global Financial Services Ltd

Cement Sector - Nuvoco Vistas agrees to buy cement assets of Emami Group By Emkay Global

Posted in Broking Firm Views - Sector Report| #Cement Sector #Emkay Global Financial Services Ltd. #Sector Report

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Nuvoco Vistas agrees to buy cement assets of Emami Group

* As per the exchange filing of Emami Ltd, the company has entered into a binding agreement with Nuvoco Vistas Corp. for the disinvestment of its 100% equity in Emami Cement. The enterprise value for this transaction has been decided at Rs55bn. Nuvoco is a part of Nirma Group and it earlier was known as Siddhivinayak Cement. Nirma group had completed the acquisition of the Indian cement assets of Lafarge in Oct’16 post the global merger of Holcim and Lafarge groups.

* Emami Cement has clinker capacity of 3.2mt and a grinding capacity of 8.1mt. The integrated plant of the company is located in Risda, Chhattisgarh, while other grinding capacities are located in the states of West Bengal, Odisha and Bihar. Management had plans to increase capacity of the Bihar grinding unit to 2mt from 0.6mt. It also has captive power plant of 30MW and waste heat recovery system of 9MW.

* Emami sold 64% of its volumes in the trade segment in FY19. Our interactions with industry people suggest that in many markets (e.g., Bihar and Odisha), it sells 50% of its volumes in the non-trade segment. We are not aware of current profitability of Emami, though it generated EBITDA/ton of Rs457/Rs305 in FY19/FY18. Emami used to sell 87- 88% of its volumes in the East markets and rest in the Maharashtra/Madhya Pradesh markets. Industry people indicate that Emami’s brand is categorized mostly as B category in its markets.

* Nuvoco has installed capacities of 13.2mt (5mt in the North and 8.2mt in the East region) which will be expanded to 14.7mt by FY21E. It sells approx. 70% of volumes into the East markets and rest in the North markets. In the East markets, it is considered as an A category brand. Nuvoco sells 80% of its volumes in the trade segment.

* Nuvoco generated EBITDA of Rs9bn/Rs6.3bn in FY19/H1FY20 and debt of the company was approx. Rs34bn/Rs35.7bn in FY19/H1FY20. We believe that net debt/EBITDA of the company will improve to 3x at FY20-end vs. 7.5x in FY19. Given the brand image of Nuvoco in the East region and other synergies (logistics, marketing, etc.), we believe that it has the capabilities of improving the profit of acquired assets, although it will not be an easy task. Even after assuming a profitability of Rs700/ton for the acquired assets and Rs1,000/ton for Nuvoco’ s own assets, we believe that net debt/EBITDA will again increase to 6.6x in FY21E (considering Emami assets for the full year FY21E).

* Based on our calculations, we believe that Nuvoco has paid a fair valuation for Emami’s assets considering the capabilities to expand clinker capacity and thus, make use of additional grinding units. We believe that the fair valuation has been arrived at: US$120/ton for grinding capacities associated with clinker plants, US$50/ton for additional grinding units (discounted at 8% for two years of lower production) and savings of US$20/ton on land and other infrastructure for additional clinker lines.

* We believe that the consolidation in the sector is overall positive from a pricing perspective in the long run although it also depends on the behavior of large players/market leaders. The industry has witnessed pricing power in the Central, North and Gujarat markets post the integration of JP Group’s capacity with UltraTech and again after UltraTech’s acquisition of Binani Cement.


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