NUVOCO-EMAMI Yet another debt-driven deal
NUVOCO-EMAMI Yet another debt-driven deal

NUVOCO-EMAMI Yet another debt-driven deal

Cement companies are becoming the target of sales by debt-laden industry groups, but consolidation is a blessing in disguise v/s Greenfield expansion for industry margins.

Nuvoco Vistas Corp, a Nirma group company, has chosen an inorganic route in February to expand its business by taking over Emami Group's 8.3-million-tonne-per-annum (mtpa) cement business for an enterprise value of Rs 5,500 crore in an all-cash deal. The deal, expected to consummate in three to four months time, will take Nuvoco's total capacity to 23.5 mtpa, after necessary regulatory approvals. This is yet another debt-driven deal in the cement industry. Last year, Emami Group decided to monetise its cement assets for around Rs 7,000 crore to become debt-free at the group level by March 2020, including repaying its own debt of about Rs 2,500 crore. However, Emami promoters will have to create an 8 per cent fresh pledge to Nuvoco to provide additional comfort against a limestone mining lease disputes. However, this deal falls short of Rs 500-600 crore for the group to become debt-free even as the group's founders have sold 20 per cent stake in their flagship household goods company, Emami, for Rs 2,830 crore as part of the plan, in 2018-19.

Emami Cement operates an integrated cement plant and three grinding units spread across Chhattisgarh, Odisha, Bihar and West Bengal. The sale also includes all the assets and mining leases in Chhattisgarh, Rajasthan and Andhra Pradesh, on 300 million tonnes of limestone deposits that will last for 60 years.

Prize catch
Nuvoco has bought out the Kolkata-based Emami's cement business at $110/tonne valuation. This compares positively with its own acquisition of 11-mtpa Lafarge Holcim's plants at an estimated $125/tonne in July 2016, and that of UltraTech Cement, which had taken over Binani Cement for $130/tonne, in a prolonged battled through Insolvency and Bankruptcy Code (IBC) process last year.

Nuvoco had beaten bigger player like Ambuja, multinational Heidelberg and local rival Star Cement to the post to further consolidate its position in the east, where it has a market share of over 10 per cent already.

This acquisition will bring Nuvoco's total cement capacity in eastern, northern and western India to 23.5 mtpa, including the capacity expansion project underway at its Jojobera plant and over 60 ready-mix plants. The combined operations will span three facilities in Chhattisgarh, two each in Rajasthan and West Bengal and one each in Bihar, Jharkhand, Odisha and Haryana.

At present, Nuvoco runs four integrated plants in Chhattisgarh and Rajasthan and three grinding plants in West Bengal, Jharkhand and Haryana with a total installed capacity of around 15.2 mtpa, besides having own captive limestone mines and clinker capacity.

The bolstered Nuvoco's cement market will cover states such as Chhattisgarh, Odisha, West Bengal, Bihar, Jharkhand, Rajasthan, Madhya Pradesh, Gujarat, NCR region, Punjab, Uttar Pradesh and Haryana. It has a substantial presence in slag cement in the east, and a strong portfolio of Pozzolona Portland Cement (PPC) and Ordinary Portland Cement (OPC) products.

Nuvoco Chairman Hiren Patel says, "This acquisition is a momentous and transformational step in Nuvoco's journey to becoming a major building materials company in India. It will enable us to take our cement business to the next level, and continue to serve our customers with innovative and high-quality products that they trust." The acquisition will catapult Nuvoco to the sixth position in terms of capacity in the industry, where UltraTech Cement is the leader with about 110 mtpa capacity. However, it will make the producer a serious player regionally in Chhattisgarh and Rajasthan. Nuvoco is in the process of setting up captive power plants and waste heat recovery systems during the current fiscal.

Ratings impact
India Ratings and Research had put Nuvoco's long-term rating "Ind AA" under rating watch evolving (RWE), days after the company acquired a 100-per cent stake in Emami Cement. The rating agency believes that the acquisition will significantly strengthen Nuvoco's market position, making it the sixth-largest cement manufacturer in India and the largest in the eastern region, it said, ahead of the company announcing its financing plan, which according to the rating agency could involve funding of the equity value through fresh equity/quasi equity infusion. The rating firm has also envisaged that the combined entity's earnings before interest, tax, depreciation and amortisation (EBITDA) could exceed Rs 2,000 crore in 2020-21 with EBITDA-per-tonne of over Rs 1,000, comparable to most of the major players in the industry, but may "delay Nuvoco's deleveraging plan by a year".

Debt-free aim
The objective of Emami's deal is part of the group's plan to become debt-free. Last year, the group's founders have sold 20 per cent stake in their flagship household goods company, Emami, for Rs 2,830 crore as part of the plan. The deal was also intended to completely clear the Rs 3,000 crore loans against promoter shares in the FMCG firm.

"This transaction is an important step in our group's stated objective of becoming debt-free and with this transaction, we will substantially achieve this objective,"said Manish Goenka, Director of Emami Group. However, this deal falls short of Rs 500-600 crore for the group to become debt-free Goenka says that the promoter pledge in Emami will come down to less than 25 per cent from around 70 per cent of the total promoter holding after consummation of the deal. It would have come down to 15-17 per cent, but there is 8 per cent security guarantee given to Nuvoco in terms of promoter shares in Emami for a legal case against the cement company regarding some mines, he adds.

As per the stock exchange data, around 71.58 per cent shares of the total promoter holding of 52.73 per cent in Emami are pledged as of December 2019.

"We have committed that by March 2021 our debt should be down to zero. So, we are trying to monetise not just the pharmaceutical business but also other land parcels that we have," says Goenka.

Consolidation
Cement industry has been the oasis in the debt-laden corporate world. This is reflected in debt-laden corporate entities/groups trying to off-load their cement assets in many cases to repay lenders.

In 2016, Reliance Infrastructure sold its cement assets to Birla Corp for Rs 4,800 crore as part of the Anil Ambani-led company's efforts to pare debt, while UltraTech Cement has been a serial acquirer of sorts - having acquired 21.2 mtpa cement capacity from Jaiprakash Associates, part of debt-laden Jaypee Group in June 2017, and bankrupt Binani Cement for around Rs 7,600 crore in 2018.

Thus, UltraTech has set the bar high for other players by taking its total capacity close to 110 mtpa and forcing others to follow if they want to be serious players. Changes in mining regulatory environment, has made it difficult for development of green filed projects. Thus, mergers and acquisitions (M&A) have become the best way as this process also protects the industry margins from eroding with the entry of new capacity.

- BS SRINIVASALU REDDY

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