Nuvoco Vistas Corporation

Focused on eastern India

Undertaken series of debt-funded acquisitions to build capacities. The IPO is to reduce this debt

Nuvoco Vistas Corporation (NVC) is engaged in the business of manufacturing and sale of Cement and Ready Mix (RMX) along with trading and manufacturing of Aggregates. The company caters mainly to the domestic market. NVC acquired Nu Vistas in FY2020 making the company fifth largest cement manufacturer in India.

NVC is present in 14 states with a significant presence across the eastern region and a moderate presence in the northern and central regions. The company has around 11% market share in the eastern market.

As of December 31, 2020, the company's cement production capacity constituted approximately 4.2% of total cement capacity in India, 17% of total cement capacity in East India and 5% of total cement capacity in North India.

The company's products include Cement, RMX and modern building materials. Cement contributed 94.91% while the RMX contributed 5.08% and the balance was from modern building materials to the total sales in FY2021.

The cement division of the company has established a stronghold with innovative and world-class cement products by prioritizing the use of premium quality raw material. Its products have been awarded some of the highest regulatory ratings owing to its constant emphasis on delivering superior grade cement variants like Concreto, Duraguard, and PSC. The recent launch of Concreto green by the company saves upto 25% water.

The company has its in-house research and development team at the Construction Development and Innovation Centre (CDIC) located in Mumbai to help the company produce superior quality and inventive products.

The company's cement plants are in the states of West Bengal, Bihar, Odisha, Chhattisgarh and Jharkhand in East India and Rajasthan and Haryana in North India.The company's cement plants have an installed capacity of 22.32 million metric ton per annum. The company has eight cement plants located in East India and three in North India. Three of the company's plants in East India are integrated units and five plants are grinding units. Two of the company's plants in North India are integrated units and the third is a blending unit. The company has waste heat recovery system at its integrated plants with a total capacity of 44.7 Megawatt (MW), solar power plants with a total capacity of 1.5 MW and captive power plants with generation capacity of 105 MW.

NVC enjoys a market share of about 11%. NVC was operating at more than 95% capacity utilisation which would have constrained growth given the favourable demand in the eastern market. However, post-acquisition of Nu Vista, Nuvoco Vistas Corporation's market position has improved with overall capacity of 22.32 million metric tons per annum across plants in Chhattisgarh, Jharkhand, Bihar, Odisha, Rajasthan and West Bengal. Presence of Nu Vista`s split grinding units across eastern states and integrated unit in Chhattisgarh will complement Nuvoco Vistas Corporation's existing plants in the eastern region.

For FYs 2021, 2020 and 2019, the total capacity utilisation of all its plants across India, calculated based on total production capacity, was 77.57%, 90.05% and 92.99%, respectively. During the same periods, the company's total cement-to-clinker ratio across all units was 1.73, 1.73 and 1.72, respectively.

The company's RMX segment comprises excellent quality products like Agile, Artiste, XLite, InstaMix, and Robuste. The company is the preferred partner for numerous developers, small contractors, builders, architects, government agencies and individuals alike, supplying efficient concrete solutions that improve the quality of construction. The company has 49 RMX plants located across India.

The company also offers a wide variety of value-added products including construction chemicals, multipurpose bonding, and waterproofing agents, Wall Putty, Tile Adhesive, Ready-Mix Dry Plaster and Cover Blocks under our Zero M and InstaMix brands.

The company distributes its products through the trade segment, which mainly caters to individual home buyers (trade segment), and the non-trade segment, which is mainly via direct sales to institutional and bulk buyers (non-trade segment). The company's focus is on the Trade Segment, where its distribution channels are a mix of wholesale and retail dealers and a sub-dealer network.

The company is promoted by Dr.Karsanbhai K Patel and Niyogi Enterprise Private Limited. He is the founder and promoter of Nirma group.

Object of the offer

The offer comprises a fresh issue of 26315789 equity shares at upper price band of Rs 570 and 26785714 equity shares at lower price band of Rs 560 aggregating up to Rs 1,500 crore by the company and an offer for sale by selling shareholders (Niyogi Enterprise Private Limited) of up to 61403509 equity shares at the upper price band of Rs 570 and 62500000 equity shares at the lower price band of Rs 560 aggregating to Rs 3,500 crore.

Niyogi Enterprise Private Limited pre-issue shareholding was 82.43%, which shall decrease to 67.07% at the upper price band of Rs 570.

The company proposes to utilize the net proceeds of the fresh issue towards repayment/prepayment/redemption, in full or part, of certain borrowings availed of by the company amounting to Rs 1,350 crore and balance towards general corporate purposes.The company had a total debt of Rs 7130.2 crore as on Jun, 2021 resulting in Debt/Equity ratio of 1.0x as on March 2021.

Strengths

It is the fifth largest cement company in India and the largest cement company in East India in terms of capacity.

The government's focus on infrastructure (especially roads) and affordable housing is expected to bolster cement demand.

There is immense potential in the eastern region for construction of roads, housing, and other civil construction. This coupled with government's infrastructure push will lead to higher uptake of cement. Further, in the east, cement consumption is lower than the national average. This situation will change, as per capita consumption of cement in the east will increase. NVCs 17.5 million metric tons capacity in the fastest-growing eastern region is the largest, making up for around 20% of the region's capacity. Also, capacity consolidation in the region should help stabilize pricing power.

The established market position of NVC is supported by strong brands (such as Duraguard, Concreto, Infracem). Strong brand equity provides the company ability to command a premium for products. The company is selling its premium products at a premium of Rs 25-30/per bag.

The company's cement plants are strategically located with road and rail connectivity to its key markets of East India and North India. Its plants are also located in proximity to its limestone reserves and other raw materials, such as slag and fly ash. The company transports clinker from its integrated cement plants to its grinding units via rail and road. Gypsum, coal, slag, and pet coke, which are essential raw materials for the manufacture of cement and generation of power for its captive power plants, are sourced via rail and road. The company has captive railway sidings at six of its plants, these give the company a significant competitive advantage in transporting raw materials and finished products from these plants.

The company has undertaken many cost optimization initiatives including the setting up of captive power plants [CPP], waste heat recovery systems [WHRS], and debottle necking of existing capacities in the existing business. Further, cement companies located in the east are better placed as the prices have bottomed out and are able to pass on the increase in cost inflation to the consumers.

The company has developed strong relationships with its channel partners over the years and built a loyal base of customers across its operational markets with the aim to achieve both its customers' and its own growth objectives. The company operates through a range of distribution channels and direct sales to improve its reach to customers. As on March 31, 2021, the company had 244 clearing and forwarding agents (162 in East India and 82 in North India) and 16,076 dealers in India (10,091 in East India and 5,985 in North India). Its institutional and corporate clients undertake bulk and large volume purchases. In FY 2021, the company's sales from the Trade Segment of the market constituted 73% (East India - 76%, North India - 56%, Central India - 79%) of total cement sales volume, whilst sales from the Non-trade Segment constituted 27% (East India - 24%, North India - 44% and Central India - 21%) of total cement sales volume.

The northern region has seen capacity consolidation in the last couple of years. The utilization levels in northern region are also high. Also, there is less new entrants in the northern region. All these factors have led to firm cement prices in the northern region. Nuvoco Vistas Corporation will benefit from this as the company diversified into northern region by commissioning an integrated plant in Rajasthan, split blending unit in Haryana and transfer of 2.28-million-ton Nimbol asset (in Rajasthan) from Nirma to Nuvoco Vistas Corporation in FY2020. The existing units, combined with the Nimbol assets shall benefit from synergies, including rationalisation of marketing network and cost savings due to ramp-up in scale of operations.

Weaknesses

The company's business is related to construction activity and infrastructure developments in India and demand for its products is largely dependent on the output of the construction and real estate industries. The performance of these sectors is influenced by the general economic conditions prevalent in India. A slowdown in the Indian economy could adversely affect the company's business, especially if such a slowdown were to be continued and prolonged.

Owing to healthy growth opportunities in eastern markets and strong traction in demand, lot of pan India players including Shree Cement Ltd, Dalmia Bharat Ltd, JK Lakshmi Cement are increasing their presence in eastern market. This will result in increased competition for the company going forward.The company earns 70-80% of its revenues from Eastern India.

Power and fuel expenses account for 20-25% and freight expenses account for around 20% of the cement sector's operating cost. Rising commodity prices have hit the cement sector hard in the last 6-9 months. The cost of imported petroleum coke (petcoke), a key input, has more than doubled to around US $150 per ton on a year-on-year basis. This steep surge is a result of higher sea freight and supply-side constraints. Also, prices of international coal (which is an alternate to pet coke) have gone up by 35-40% as compared to the first half of the last year touching around US$100 per ton. All the above factors have led to cost pressure on cement companies.

The second week of April 2021 saw a resurgence of covid-19 in India, with a second wave of infections spreading across the country. To curb the spread of the virus, various state governments-imposed lockdowns, curfews and other restrictions during the three months ended June 30, 2021. As a result, there was a slowdown in construction activity, which impacted the demand for cement in various parts of India. Consequently, the company's production and sales volumes were impacted (consistent with the industry as a whole) during the months of April and May 2021. Demand revived in the month of June 2021 as the number of COVID-19 cases started reducing, leading to relaxations in restrictions imposed by governments. The company's production and sales volumes were lower for the three months ended June 30, 2021, compared to the immediately preceding quarter. For the three months ended June 30, 2021, the company's consolidated sales volume amounted to 4.23 million tons, as compared with 5.60 million tons for the three months ended March 31, 2021. There was an increase in the company's cement price per tonne (for the three months ended June 30, 2021, compared to the three months ended March 31, 2021) primarily driven by an increase in input costs. Further, emergence of third wave of covid-19 might have an adverse impact on company's business and financial condition.

In 2016, the group acquired the Indian assets of LafargeHolcim for US $1.4 billion, outbidding heavyweights like the JSW Group and the Piramal Group. In February 2020, it inked a US $770 million deal to purchase the cement assets of the debt-ridden Emami group. All these acquisitions were majorly funded through debt resulting in Debt/Equity of 1.04x as on March 31,2021.

Due to high interest costs and underutilised newly acquired capacities, the company reported losses at the net level in two out of the last three years (including the latest year FY21)

The recently enacted Mines and Minerals (Development and Regulation)Amendment Act, 2021(Amendment Act) may result in lapsing of letters of intent for the grant of mining leases under Section 10A of the MMDR Act. In addition, the Amendment Act may also impact the continuity of certain non-operating mining leases

Valuation

For FY 2021, consolidated sales were up by 10.2% to Rs 7,488.84 crore primarily due to ramp up at the Jaipur plant which was commissioned in March 2020 and benefit from strong presence in eastern India. OPM rose 41 bps to 19.5% which led to 12.59% increase in operating profit to Rs 1460.50 crore. Other income decreased 7.77% to 33.85 crore while interest cost increased 58.4% to Rs 664.03 crore and depreciation increased 50.37% to Rs 793.79 crore. PBT declined by 90.55% to Rs 36.54 crore. Tax expenses declined by 54.58% to Rs 62.46 crore. Net loss stood at 25.92 crore as against net profit of Rs 249.25 crore.

As the company is making losses, P/E ratio cannot be calculated. At the higher price band of Rs 570, the offer is made at around 16.9 times post-IPO EV/FY2021 EBITDA. Listed industry peers of the company are Shree Cement, JK Lakshmi Cement, JK Cement, Ultratech, Sagar Cement and India Cement. In comparison Shree Cement trades at 23.86 times its EV/FY2021 EBITDA, JK Lakshmi Cement trades at 6.55 times its EV/FY2021 EBITDA, JK Cement trades at 14.99 times its EV/FY2021 EBITDA, Ultratech trades at 17.47 times its EV/FY2021 EBITDA, Sagar Cement trades at 5.47 times its EV/FY2021 EBITDAand India Cement trades at 10.96 times its EV/FY2021 EBITDA. All these peers are making profit at the net level also.