Bankruptcy Law - A game changer
With Bankruptcy process coming into effect, consolidation has become the order of the day in the sector, which is expected to change the industry pecking order.
Consolidation is in the full swing in the Indian Cement Industry. The pace has accelerated over the last four years. It has not been happening just because of operational reasons, but heavy debt built up by some players. Though the realisation that high debt is counter-productive has dawned on such players in 2015 itself, the pace of consolidation accelerated only in the last couple of years after such companies were set to be brought under the purview of the Insolvency and Bankruptcy Code (IBC), through its nodal agency - National Company Law Tribunal (NCLT).
Unlike the earlier buyout deals like Jaypee group, Lafarge and Reliance cement businesses, which had different reasons (including lower demand, governance etc.) for taking their companies for sale, besides mounting debt, the latest breed of consolidation in the cement sector is happening perforce under the hammer of NCLT, though cement industry per se is not passing through difficult times despite low plant load factors at around 65 per cent.
So far, bad debts of only two cement companies - Murli Industries and Kalyanpur Cement - have been resolved through NCLT, both of which went in favour of Dalmia Bharat. The completed deals involved 3 million tonnes and one million tonnes respectively. The third one, Binani Cement matter is hanging fire for the last few months, with two major bidders - Dalmia Bharat and UltraTech Cement - vying for the 11 million tonne capacity.
Murli Industries' bankruptcy matter was resolved in December 2017 with the lenders favouring a deal with Dalmia Bharat (DBL). As per the resolution plan, DBL will cancel almost the entire equity of Murli Industries and pay its lenders Rs 3.5 billion in cash, which means a haircut of 80 per cent for lenders. As per the plan, DBL will infuse capital of Rs 690 million in Murli Industries to hold more than 90 per cent stake in the company. Dalmia will also repay other statutory dues such as taxes and salaries of workmen and employees.
Murli Industries had availed loan of Rs 9 billion, but with interest and penalty, its total outstanding rose to Rs 17 billion. Edelweiss Asset Reconstruction has owned 60 per cent of Murli Industries' debt, followed by Bank of Baroda with 25 per cent. The remaining debt is with other asset reconstruction companies including ARCIL.
DBL has outbid the other players like JSW Cement, JK Lakshmi Cement and Star Cement, for acquiring the Patna-based Kalyanpur Cements. The concerned resolution, finalised in February 2018, is expected to be more than Rs 3.5 billion. Operational creditor Naresh Kumar & Company brought Kalyanpur Cement to the bankruptcy court in May 2017. The company owed Rs 6 billion to the banks and operational creditors, according to reports. Since 2014, the production of the company fell from an average level of ~7 lakh TPA (tonnes per annum) to 2.23 lakh TPA in FY17 (2016-17). The company reported a loss of Rs 9.5 million
Binani - A test case
However, bids for Binani Cements is proving to be a test case for implementation of the IBC, which has become a statute in the first week of January 2018. It has taken a lot of twists and turns - first Dalmia Bharat bid was approved by the Resolution Professional Vijaykumar V Iyer based on the primary bids. Having no other option, UltraTech Cement, which has been vying for the acquisition has given a letter of comfort to Binani with a promise to commit much higher amount, prompting Binani Cement, the target defaulter company to seek an out of court settlement from NCLT, which was not an option available under the resolution process as evolved as of now. If Binani is allowed to get out of NCLT resolution process that will open up new avenues to the defaulting companies a new and better way out of the hitherto stringent process.
An Aditya Birla Group company, UltraTech has put in a Rs 72.66-billion bid for Binani Cement, Rs 7 billion higher than that of DBL's offer. Bank of Baroda had moved NCLT, Kolkata in July 2017 after the company failed to repay Rs 39.7 billion debt.
Though the capital market was expecting another large and anticipated merger between ACC Ltd and Ambuja Cements Ltd to take place, it was shelved by the companies recently.
The process of insolvency resolution plan or IRP begins after any financial creditor makes an appeal in the adjudication authority under the IBC for commencing the IRP against any corporate defaulter. Once the application is submitted, a resolution professional is appointed to constitute a committee of creditors - financial creditors and operational creditors - to work on a resolution plan to revive the debt-stressed firm in a time-bound manner or dissolve it - with a cap of 180 days. Under IBC, the resolution plan must have approval of at least 75 per cent of the creditors.
Usually, companies opt for inorganic growth or a brownfield expansion, which are considered to be both time and cost efficient. 'From asset pricing perspective, we feel that this is a better time to buy rather than build cement assets,' said Puneet Dalmia, managing director for Dalmia Bharat Group recently.
Besides, demand for cement has been subdued for a couple of years, to which regional demand-supply gaps also contribute. For example, in the states of Andhra Pradesh and Telangana, the total available capacity is nearly 85 million tonnes per annum (mtpa), while demand is around 20 mtpa, posing a marketing challenge to regional manufacturers. Governance issues were affecting smaller companies leading to low profitability.
The earlier deals that have taken place before December 2017 were taken up ourside NCLT, i.e., based on commercial considerations. Jaiprakash Associates was the third largest cement maker in the country with annual capacity of 31.65 million tonne in 2014. It had sold 13.3 MT capacity in 2014-15 to repay debts. Thus, it has a long history of shedding cement assets over the last four years. Before IBC process was initiated, Jaypee Group has sold 21.2 MT (million tonne) of its capacity to UltraTech Cement for Rs 161.89 billion. Lafarge sold 13 million tonnes capacity to Nirma and Birla Corporation has bought 5.5 million tonne capacity of Reliance Cement.
New pecking order
IBC, which was in the works for a few years now, has assumed its preliminary form in November 2017 through an ordinance, and later passed by Lok Sabha and Rajya Sabha in December, 2017 and January, 2018 respectively. The new code is expected to change the pecking order of the cement industry in the country, the second largest in the world, to a large extent in the coming years, even as Binani process is resolved.
Binod Modi, Senior Research Analyst, Reliance Securities,
said in a recent report that the consolidation in the cement sector is inevitable as there are about 20 large cement companies in India compared to four to five in the sector globally.
Binani in NCLT-Timeline
- July 2017 - Bank of Baroda files insolvency petition against Binani Cement in NCLT, Kolkata
- Feb 24, 2018 - Committee of Creditors discusses resolution plans of all applicants
- Feb 27- Dalmia Bharat-led consortium emerges highest bidder with Rs 63.50-bn offer
- March 7 - UltraTech Cement raises bid to Rs 72.66 bn
- March 13- NCLT seeks details of Dalmia Bharat selection process; resolution professional (RP) alleges fraud in Binani, submits application in NCLT
- March 14- CoC favours Dalmia Bharat's proposal; RP issues letter of intent
- March 19 - NCLT adjourns case till March 22; UltraTech directly negotiates with Binani to pick up 98.43% stake for Rs 72.66 bn, subject to termination of IBC proceedings
- March 20 - Dalmia Bharat-led consortium deposits 10% of bid amount
- March 22 - UltraTech Cement and Binani Cements make allegations against RP; NCLT orders resolution professional to respond by March 26
- March 27- On Binani Cement's petition to terminate IBC proceedings, NCLT asks CoC to consider the proposal, while suggesting possible out-of-court settlement
- BS Srinivasalu Reddy