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Corporate Finance 2013www.bdoindia.co.in
INDIAN CEMENT SECTORAn Update from BDO India Corporate Finance
QUICK FACTS:• Indiaisthe2ndlargestintheworldintermsofcement
productionbehindChina.
• Installedcapacityof330milliontonnes(MT).
• Over139largecementplantsand365minicementplantsareoperatinginIndia.
• CementconsumptionpercapitainIndiaisapproximately136kgandisoneofthelowestintheworld(Worldaverage508kg).
INDUSTRY STRUCTURE:• Morethan46playersintheindustrywithmajorplayersbeing
UltratechCementLtd.,ACCLimited,AmbujaCementsandJaypeeCements.
• Industryremainsconcentratedwithtopfiveplayerscontrollingalmost60%ofthetotalinstalledcapacity.
• Overallindustryissubdividedintodomesticregionsincludingnorth,south,west,eastandthecentralregion.
• Excesscapacityinthesouthernregionowingtotheabundantavailabilityoflimestone.Over23milliontonnesofcementcapacityhascomeonstreamduringlasttwoyears.
REGIONAL PLAY:
MARKET SHARE:
11%
10%
18%5%
8%
5%
43%
Source: Company investor presentation
ACC
Ambuja
Ultatech
India Cements
Jaypee Cements
Shree Cements
Others
45%
40% 40% 40%
38%
34%
36%
38%
40%
42%
44%
46%
2007-08 2008-09 2009-10 2010-11 2011-12
Market share of top 3 players
Source: Macquarie research, March 2012
Cement Industry
Rajasthan, Punjab, Haryana & NCR
West Bengal, Chhattisgarh, Orissa & Jharkhand
Tamil Nadu, Andhra Pradesh & Karnataka
Uttar Pradesh & Madhya Pradesh
Maharashtra & Gujarat
North
South
West
Central
East
POLICY AND REGULATORY INITIATIVES BY GOVERNMENT OF INDIA Key highlights of Union Budget 2013 - big push for infrastructure
• The12thPlanprojectsaninvestmentofUSD1trillionorINR55,000billionininfrastructure,ofwhichtheprivatesectorwillshare47%.
• InfrastructureDebtFunds(IDF)tobeencouraged.Thesefundswillraiseresourcesand,throughtake-outfinance,creditenhancementandotherinnovativemeans,providelong-termlow-costdebtforinfrastructureprojects.
• FourIDFshavealreadybeenregisteredwithSEBIandtwoofthemwerelaunchedinFebruary,2013.
• IndiaInfrastructureFinanceCorporationLtd.inpartnershipwiththeAsianDevelopmentBank,willoffercreditenhancementtoinfrastructurecompanies.
• Infrastructuretax-freebondofINR500billiontobeallowedinFY13-14.
• GovernmentwouldseekfundsofmultilateralagenciessuchastheAsian Development BankandtheWorld Bank to build roadsinnortheasternIndia,linkingtheregionwithneighboringMyanmar.
• CorpusofRuralInfrastructureDevelopmentFund(RIDF)operatedbyNABARDtoberaisedtoINR200billion.
• INR50billiontobeprovidedtoNABARDtofinanceconstructionforwarehousing.
• 3,000kmsofroadprojectsinGujarat,MadhyaPradesh,Maharashtra,RajasthanandUttarPradeshwillbeawardedinthefirstsixmonthsofFY13-14.
• RegulatoryAuthoritytoremovebottlenecksinroadsectortobeconstituted.
• Governmentwouldpushforbuildingofnewportsandindustrialcorridors.
• PPPpolicyframeworkwithCoalIndiaLimitedasoneofthepartnersunderconsiderationinordertoincreasetheproductionofcoalforsupplytopowerproducersandotherconsumers.
• Hikeinimportdutyoncoalto4%vs.currentrateof1%-anegativeforcompanieslargelydependentonimportedcoal.
• AdditionaldeductionofinterestuptoINR0.1millionforapersontakingfirsthomeloanuptoINR2.5millionduringperiod
1.4.2013to31.3.2014-astimulusforcementsector.
NATIONAL COUNCIL FOR CEMENT AND BUILDING MATERIALS (NCB) • TheDepartmentofIndustrialPolicyandPromotion(DIPP)
whichoverseesthedevelopmentofcementindustriesinIndia,hasestablishedtheNationalCouncilforCementandBuildingMaterials(NCB).
• NCBisanapexbodydedicatedtocontinuousresearch,technologydevelopmentandtransfer,educationandindustrial
servicesforthecementandbuildingmaterialindustries.
Development Council for cement industry• TheDevelopmentCouncilforcementindustrywasestablished
undertheIndustriesDevelopmentandRegulationAct.
• ItaimstodevelopandpromotethecementindustryinIndiabyfundingprojectsrelatedtoincreasingproductivityviacostreduction,optimizingtheutilityofrawmaterials,standardizationofmethodsandqualitycontrols,environmentalimprovementandmodernization.
Cement Manufacturers ‘Association (CMA) - a bridge between the Indian cement industry and the Government• Establishedin1961,CMAistheapexbodyofcement
manufacturersinIndia.
• Hasboththeprivateandpublicsectorcementcompaniesasits
members.
Competition Commission of India (CCI)• EstablishedbytheCentralGovernmentwitheffectfrom14th
October2003
• Duty:Toeliminatepracticeshavingadverseeffectoncompetition,topromoteandsustaincompetition,toprotecttheinterestsofconsumersandensurefreedomoftradeinthemarketsofIndia.
• CCIkeepsaclosecheckontheactivitiesofIndiancementmanufacturers.
IMPACT OF UNION BUDGET :Budget 2013: No changes proposed despite industry’s expectation of reduction in excise duty!
Budget 2012:• Excisedutyrationalisedforpackagedcement
• RSPbasedvaluationprescribedforPortlandcement(inpackagedform)with30%abatement.
• Standardrateincreasedto12%.
Summary of rate changes
Items Excise duty rate movement(%)
Basic Duty From To
Packagedcementmanufacturedinaminicementplant
whereretailsalepricedoesnotexceedINR190per50kilogrambagorwherepertonneRSPdoesnotexceedINR3,800
whereretailsalepriceexceedsINR190per50kilogrambagorwherepertonneRSPexceedsINR3,800
10%
10%+INR30per tonne
6%+INR120per tonne
6%+INR120per tonne
Packagedcementmanufacturedotherthaninamini-cementplantwhereretailsalepricedoesnotexceedINR190per50kilogrambagorwherepertonneRSPdoesnotexceedINR3,800whereretailsalepriceexceedsINR190per50kilogrambagorwherepertonneRSPexceedsINR3,800
10%+INR80per tonne
10%+INR160per tonne
12%+INR120 per tonne
12%+INR120 per tonne
Cement,notclearedinpackagedform
10% 12%
Cementclinker10%+INR200
per tonne12%
TREND IN FDI INFLOWS:
28,305
4,396
12,934
20,457
10,039
-
5,000
10,000
15,000
20,000
25,000
30,000
2010-11 2011-122009-102008-092007-08
Amou
nt in
INR
milli
on
FDI Inflows
Source: Department of Industrial Policy and Promotion
• TotalFDIinflowsincementandgypsumsectorduringtheperiodfromSeptember2008toSeptember2012remainedINR76,131million(USD1,686million).
• Duringtheperiod2007-09,therehasbeenasharpdeclineofFDIInvestmentsinthissector,becauseoftheglobaleconomicslowdown.FDIinvestmentsfellsharplyby84%in2008-09ascomparedto2007-08.
• ThegrowthoftheIndiaeconomyhasslowedinrecenttimesonaccountoftherisinginflation,highinterestrates,highpricesofcommoditiesandfuels.Generallythegrowthprospectsofthecementsectorarecloselylinkedtothegrowthoftheoveralleconomyandtherealestate&constructionsectorinparticular.
• Economicgrowthwasalsoimpactedbecauseofslowdowninthemanufacturingactivitiesbecauseofcreditcrunchinthesystem.ReserveBankofIndia(RBI)hikedkeylendingratesaimedatcurbingtheinflationarypressures,whichresultedinslowdownintherealestatesectorandimpactedtheinfrastructureandconstructionprojects.
GLOBAL DEMAND:
Demand for cement (million tonnes)
2005 2012 % increase
NorthAmerica 170 200 2.9
WestEurope 208 236 2.2 AsiaPacific 1,500 1,900 5.2
Otherregions 405 500 4.7 Total world demand 2,283 2,836 4.7
Source: Philippe Lasserre- Globalisation Cement Industry
Led by a growth in the emerging markets
Overall capacity addition was impacted by a global meltdown in 2008 and the current macroeconomic uncertainties
IMPACT OF PENALTY IMPOSED BY CCI
• CompetitionCommissionofIndia(CCI)videitsorderdated21June2012found11cementcompaniesguiltyofviolationoftheprovisionsofCompetitionAct,2002whichdealswithanti-competitiveagreementsincludingcartels.
• Followingthis,CCIimposedpenaltyon11cementmanufacturersincludingACCLimited,AmbujaCementsLimited,UltratechCementLimited,GrasimCement(nowmergedwithUltratechCementLimited),TheIndiaCementsLimited,MadrasCementsLimited,CenturyTextilesandIndustriesLimited,BinaniCementLimited,LafargeIndiaPrivateLimitedandJaypeeCement.
• PerCCIorder,thesecompanieshavetopayapenaltyof50%oftheirprofitsfortheFY09-10(from20thMay2009onwards)andFY10-11withthetotalamountofpenaltiesaggregatingtoapproximatelyINR6,300crores.Thecementmanufacturershavetodepositthisamountwithinaperiodof90days.
• Further,CCIhasalsoimposedafineofINR73lakhsontheindustryassociation-CMAandhaveaskedittodisassociateitselffromcollectingwholesaleandretailpricesdatathroughmembercompanies,andalsofromcirculatingdetailsoncementproductionanddispatchestoitsmembers.
• PostCCIorder,theindustryplayerswillfinditdifficulttomaintainproductiondisciplineastheywillbeunderthescannerofCCIandthismayalsoimpactthepricingdynamicsoftheindustry,particularlyinSouthernIndiawhichhaswitnessedsignificantincreaseincapacitiesinthelastthreeyears.
KEY GLOBAL PLAYERS:
KeyGlobalplayers Particulars
LafargeWorldleaderinbuildingmaterial•Operatesin76countriesin4majorsegments–cement,aggregates,roofingandgypsum•Hasinvestedheavilyinemergingcountriesinthepastfewyears•
Holcim
Oneoftheworld’sleadingsupplierofcement,aggregatesandreadymixconcrete•Groupholdsmajorityandminorityinterestsinvariouscompaniesinmorethan70countriesandemploysmore•than90,000peopleHolcimhasastrongpresenceinIndia•
Heidelberg OriginatedinGermany,theGroupisconcentratedoncementproduction•
Cemex OriginatedinMexico,itisthethirdlargestcementcompanyintheworld•CurrentlypresentinAmerica,EuropeandAsia,thoughnotinIndiaorChina•
• Downturninworldeconomyhasadverselyimpactedthecementindustryworldwide• Inordertoovercomedepresseddemand,cementcompanieswouldneedtofocusonreducingcosts• Overthelast5years,cementmanufacturershaveshiftedfrommanufacturingOPCtoPPCbecauseofbettermargins,more
demandfromtheendusersandlessdependenceonuseoflimestoneasarawmaterial
CAPACITY UTILISATION:
• SubdueddemandandsignificantcapacityadditionshaveputsignificantpressureoncapacityutilisationofthecementindustrywithpanIndiacapacityutilisationdecliningtoaround73%inFY10-11.
• Southernregionwitnessedthehighestcapacityadditions(largelyduetoitshighestshareofcement-gradelimestonereserves)andexperiencedthesteepestdeclineinutilisationlevels.
• Theexistingsurpluscapacityhasforcedthecompaniestogoslowoncapacityexpansion.InFY11-12,theindustryhasaddedapproximately10MTofgrindingcapacityascomparedto20MTinFY11and50MTinFY10.
CEMENT PRODUCTION GROWTH:
• Dualadverseimpactofriseininflationalongwithcontractioningrowthhasaffectedtheinfrastructureprojectsacrossthecountry.
• Thishasbeenfurthercompoundedbyissuespertainingtolandacquisition;delaysinsecuringtherequisiteapprovalsandproblemsinachievingfinancialclosureaswellassector-specificissuessuchasfuelsecurityforpowerprojectsanddelaysinawardingcontractsinroadprojects.
• LackofstableleadershipinsomePSUsandcorruption-relatedinvestigationsresultedinaslowdowningovernmentspendingonprojects,andconsequentlyoncementdemand.
• PerICRA,long-termdemandforcementwouldbesupportedbyincreasingdemandforresidentialandcommercialspace,hugeinvestmentsplannedintheinfrastructuresectorandgovernmentexpenditureundervariousschemessuchasNationalRuralEmploymentGuarantee,JawaharlalNehruNationalUrbanRenewalMissionandIndiraAawasYojana
• Cementdemandbeinghighlycorrelatedwiththeeconomicaldevelopmentandhavingmentionedtheabovecriticalissues,investmentsintheprojectsappearstobeabitcritical
66%
68%
70%
72%
74%
76%
78%
80%
82%
84%
86%
88%
0
50
100
150
200
250
300
350
400
2011-12E2010-112009-10 2012-13E 2013-14E2008-09
Cement capacity
In M
etri
c to
nnes
Cement production Cement capacity utilisation
Source: Macquarie research
8.6
11.1
9.7
8.1 7.8
10.5
4.8
6.4
0
2
4
6
8
10
12
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Source: Companies data
Gro
wth
rate
KEY CHALLENGES AND RISKS
RAW MATERIAL COST:• Risinginputcostsofkeyrawmaterialoff-latehasbecomea
criticalissueimpactingtheprofitabilityofcementindustry.
• Risingdomesticcoalpricesandnon-availabilityoflowcostlinkagecoalhasincreasedthepowerandfuelcostforcementmanufacturers
• Asperindustryresearchreports,rawmaterialsaccountfor10%oftotalcostsandhavegrownataCAGRofc.25%duringlastsevenyears.Keyrawmaterialscompriselimestone(c.10%ofrawmaterial),gypsum(35%)andadditiveslikeflyash(55%)
• Off-late,thecementcompaniesdependingonimportedcoalhaveseensomeeasingincostpressuresduetodeclineinpriceofimportedcoal.However,thebenefitofdecliningpriceshasbeenoffsetbyrupeedepreciationtosomeextent
• TransportationcostisasignificantcostdrivingtheprofitsinthisindustryandthesamehasalsoincreasedduetoanincreaseinthesurchargeandcessbyIndianRailwaysinOct2011andincreaseinfreightratesforsomecommoditiesinMar2012.Recenthikeinrailwayfaresandpotentialincreaseindieselpricesisfurtheraddingtocostoftransport
• Recentlyannouncedhikeindieselpriceswillfurtherescalatethecostofproductionforcementcompanies
• Mostofthecostriseshavebeenstructuralandmayrequiresubstantialchangeslikecaptivecoalminesetc
• RisingcostshavehelpedanimprovementinthepricedisciplineastheIndustryhasbeenabletopassonthecostincreasestothecustomers
• Goingforward,withseasonalweakeningindemandduringQ2FY12,companiesarelikelytofinditdifficulttoraisepricestopassonthecosts
DIESEL PRICE DRIVING THE INCREASE:• Thecostsoflimestoneandgypsumaredirectlyorindirectly
co-relatedwithdieselusedforbothexcavationandtransportation.Withanexpectedriseindieselprice,anupwardmovementisexpectedinthepricesofkeyrawmaterials
SCARCITY IN AVAILABILITY OF FLY ASH:• Establishmentofnewpowerplantsatcoalminepitheadornear
aportbycompanieshascreatedscarcityofflyashnearthecementconsumptioncentre.ThisinturnhasmadeflyashtocostaroundINR400-500/tonnewhichonceusedtobefreeofcost
HIGHER BLENDING AND CAPTIVE GENERATION A CHECK ON RISING FUEL AND ENERGY COSTS• Increasinguseofflyashandcaptivepowergenerationhas
helpedcompaniestomitigatetheimpactofrisingfuelandenergycosts.ACChasincreaseditscaptivepowergenerationfromc.33%inFY04toc.72%inFY11.Alsotheblendingratiohasbeenincreasedfrom1.36xinFY04to1.52xinCY11
1.21
1.28
1.361.38
1.42 1.42 1.43
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
FY2004 FY2006 FY2008 FY 2010 FY 2012 FY2013E FY2014E
Conversionfactor
Theblendingratioisexpectedtoremainstablegiventhecurrentmacroeconomicuncertainties
VALUATION ASPECTS IN THE CEMENT SECTOR: • Oneofthemethodsforvaluingcompaniesinthecementsectorisbyusingcomparablecompanymultiplesmethodi.e.EV/Netsales,
EV/EBITDA&P/E.However,thereisanadditionalparameterwhichneedstobeanalyzedwhilevaluingacompanyengagedincementmanufacturing
• EV/tonne-It’sacommonpracticetoperformvaluationofcementcompaniesbydividingtheirenterprisevaluebytheirannualproductioncapacityinmilliontons
• Pereconomictimesarticledated17October2012,largecementmanufacturerslikeACC,AmbujaCementsandUltratecharetradingatanenterprisevalue(EV)pertonneofover$170.Thisishigherthanthereplacementcostofacementplantataround$160pertonne.Ontheotherhand,mid-sizedcementplantsonanaveragetradeata40-50%discounttothevaluationsoftheirlargerpeers.InSeptember,DalmiaCementacquiredMeghalayabasedAdhunikCementforINR5600million.Ithadacapacityof1.5mt.ThedealwasvaluedatUSD120pertonne
• InJulythisyear,AdityaBirlagroupmadeanoffertobuyoutJaiprakashAssociatescementplantsinGujaratandAndhraPradesh.Talksbetweenthetwofellthroughduetodifferencesovervaluation.JaiprakashAssociateswaskeenonapriceofUSD190pertonnewhiletheKumarMangalamBirla-controlledgroupwasnotwillingtopaymorethanUSD115-120pertonne.InOctoberthisyear,AdityaBirlagroupmadeanotherofferofuptoUSD130pertonne,butBirla’sdidnotpursuethedealduetoupsideinvaluation
VALUATION MULTIPLES
Source: Company published consolidated financials as available on its website. Share prices as on 28 Dec 2012 taken from bseindia.com. Market cap as on 28 Dec 2012.
* ValuationmultiplesarebasedonTTM(Trailingtwelvemonths)financialnumbersasavailableforthecompanies
RECENTLY CONCLUDED DEAL MULTIPLES
Company (Consolidated basis)
Market cap (INR million)
EV/Net sales
EV/EBITDA P/E
ACC* 264,505 2.93 11.28 40.52
AmbujaCements
309,457 3.39 13.15 25.06
UltraTech 539,515 3.05 12.85 22.45
GrasimIndustries*
288,382 1.35 5.45 15.91
IndiaCements 27,216 0.97 4.63 10.02
JKLakshmiCement
19,104 1.59 6.97 18.26
DalmiaBharatEnterprisesLtd.
14,334 1.30 5.25 11.79
MadrasCement* 59,350 2.00 6.90 23.19
Year Deal Type Target Firm
Acquirer name
Target EV/Sales (TTM)
TargetEV/EBIT (TTM)
EV/Tonne
Aug2012
Acquisition ShriDigvijayCementCo. Limited
CamargoCorrea SA,HejoassuAdministracaoLtda
0.29 13.84 n/a
Nov2011
Acquisition AndhraCementCo.Ltd.
JaypeeDevelopmentCorpLtd
9.83 n/a USD115per tonne*
Dec2011
Acquisition AmbujaCementsLtd.
Holcim Ltd 2.47 13.63 n/a
Sept2010
Acquisition MangalamCementLtd.
MangalamTimberProductsLtd
0.55 4.81 n/a
KEY PLAYERS METRICS:
Source: Company annual reports and BDO analysis
Source: Bloomberg
*http://realtydose.blogspot.in/2011/11/jaiprakash-cements-acquisition-of.html
Company(Consolidated
basis)
EnterpriseValue(INRmillion)
Productioncapacity-
Milliontonnes
EV/tonne(USD)
ACC 253,037 28.7 160.9
AmbujaCements 289,423 27.4 192.9
UltraTech 586,442 85.0 125.9
GrasimIndustries 365,393 52.3 127.4
IndiaCements 44,748 15.6 52.5
DUE DILIGENCE ASPECTSAREA KEY ISSUES APPROACH Businessoverview
Capacity/sizeMarketshareGeographicalspreadofmanufacturingcapacitiesProductpricing
ManufacturingfacilitiesareconcentratedinselectclustersacrossIndiaclosetolimestonebelts.PricingisregionspecificandmaynotalwaysmoveinsyncwithotherregionsFragmentationresultsinintensecompetitionamongsttheplayers,whichbringspricesandrealisationsunderpressureCapacity utilisation assumes great importance in the cement industry asfixed costs are high. Optimum utilisationof capacities has a direct impact onprofitabilitySince cement is a bulky commodity, themarketshareenjoyedbyaparticularentity(region specific) also influences the pricingpower
Analyse installed capacity, capacityutilisationandplannedcapacityadditions,andcomparethesamewithotherplayersintheregionAnalyseratioofblendedcementUnderstandthepricingarrangementswithotherplayersExamine the order pipeline and identifypotentialgapsReadagreementswithallexistingcustomersandascertainthepricingstrategyadopted
DemandforcementWhat is the current demand-supplyscenario?Whatchangesareexpected?How is the product branded andpositionedinthemarket?
The performance of cementmanufacturersis driven by the prevailing demand-supplyscenarioandisbothvolatileandcyclicalTheimageandpositioning(priceorpremiumquality)isalsoadeterminantfordemandforindividualcementmanufacturers
Analysetheregionaldemand-supplyscenarioandgap,ifanyAnalysecapacityadditionsinthenearfutureofalltheplayersintheregionAnalysedemanddriverssuchashousing,infrastructureintheregionComparetheforecasteddemand&supplyandquantifygap,ifany
CartelisationIsthereactiveparticipationinthecartel?Has the target been adverselyimpactedbythecartel?Isthetargetexposedtoregulatoryaction?
Many cement companies reduced prices toavoid stockbuildupand tokeep theplantoperating,forcingotherstofollowsuit
Inquireofanylegalclaims/notices,etc.receivedby thecompany inconnectionwith cartelisation, and company’sresponseandthelegalopinionssoughtAssesstheliabilitythatmayariseAnalyse whether the company hasbenefitedfromtheagreementwithothercementcompanies
Proximity to marketsHow much of the production issoldlocally?What is the average distancecovered?
Proximitytomarketshasasignificantimpacton margins, as freight costs account forapproximately16-20%oftotalcosts.Certaincement manufacturers who have access tocoastlines and ports effectively use watertransport as a cheaper alternative, thusenhancingmarginsManufacturers tend to sell cement at thenearestmarketfirstandsellindistantmarketsonly if additional realisation is greaterthan freight costs incurred. This results insignificantregionalpricevariationsRegional price variations have a directimpactonsalesrealisation. Regionswherecement manufacturers are clustered mayhave an adverse demand supply scenariowhich drives down prices. Regional pricesarealsodependentontheeffectiveworkingof the ‘cartel’ formed by major cementmanufacturers
Analyse share of local markets servedandaveragedistancecoveredAnalysesaleswithinaradiusof200km.ComparethesamewithotherplayersintheregionAssess arrangements with transportersandlogisticsmanagementAnalysepricesofdieselandrailfare.Understand the effective utilisation ofthe jetty (if available) and the regionstargeted Understandthefacilitiesandequipmentatthevariousports(outsidetheportoforiginforpackingbulkcement)
AREA KEY ISSUES APPROACH Procurement of raw materialHowfaristhelimestonemine?What is the arrangement for flyash,slag,gypsum,etc?WhatisthearrangementforcoalIs captive power generatingcapabilitiesestablished?
Limestone is the key input for themanufactureofcement.Thebulkynatureoflimestone renders transportation over longdistancesunviableProximity and access (viz. mining rights)of a cement manufacturing unit to qualitylimestone deposits is essential. Absenceof suchproximitywould result inveryhightransportation costs that could adverselyaffect margins and viability of themanufacturingfacilityLong term mining rights are essential forviabilityofacementplant.Further,adequateresidualusablelimestonedepositsavailable(limestone required annually multiplied byresiduallifeoftheplant)intheminesisalsoveryessentialCoal forms another key raw material incement manufacture, in the clinkerisationprocess.Furthercoalmayalsoberequiredin captive power plants (another criticalinputforcementmanufacture)Coal is largely government controlled withrestrictionsonthequantitytobepurchasedbyindividualmanufacturersaswellaspricefixations (quotas). Further, domesticallyprocured coal is often not of the desiredquality and transportation bottlenecksaboundProcurement of requisite quality of coal atcompetitivepricesisakeydeterminantoftheprofitabilityofacementplant,ascoalformsapproximately 26% of the manufacturingcostSomecompaniesattempttoblendlocalwithimportedcoalwhileotherschoosetoimporttheirentirecoalrequirements.Localcoalishigh onash content andoftenonmoistureas well adversely impacting averageconsumptionandfuelcostPower is another critical input for anycementplant.Availabilityofuninterruptedpowersupplyatareasonablerateisessentialfortheeconomicviabilityofacementplant.Power tariffs are usually very high andcontrolledbytheGovernmentInvestmentsmadeindieselgeneratingsetsinthepast(1997-2000)didnotprovidealongtermsolutiontocementmanufacturerswiththepriceofdieselincreasingtwofoldAsaresult,mostlargecementmanufacturershavesetuptheirowncaptivepowerplants,incurring high capital expenditure. Somecompanieshaveinvestedinmerchantpowergenerating companies set up close to theirmanufacturing facilities to ensure powersupply and limit investments in powergeneratingfacilities
Understand distances from limestoneminesandfacilitiesfortransportationoflimestonetotheplantAnalyse supply arrangements for coal,furnaceoilandotherinputsAssess the supply source in respect ofreliability,quality,longevityandcosts.Analyse feasibility of import of coal/clinkerasalternatives
Analysethepowerscenariointheregiontoassesswhetheritisapowersurplus/shortageregionAssesspossibility of reduction inpowercosts through enhanced productivity/alternativesourcingofpower/alternativefuelsRead shareholders agreements / jointventure agreements for investmentsmadeinpowergeneratingfacilities
AREA KEY ISSUES APPROACH Control over operating costsWhat is the dependence on thegovernment for provision ofcriticalinputssuchaspower,coal,limestone,etc?
Mostofthekeyrawmaterialssuchascoal,powerandlimestoneareundergovernmentcontrol. Thus, price negotiation is notpossiblebeyondapointThus, cement manufacturers can do verylittle to reduce operating costs beyond apoint, and hence have to concentrate onimproving margins through higher pricerealisation, and higher productivity (betterinput-outputratio)Companieshaveresortedtoblending(flyashorslag)andsettingupcaptivepowerplantsforcontrollingcoststoalimitedextentTransportationcosts,ofboth rawmaterialsandfinishedproductsarehigh.Transportationcostsaredependentlargelyontheproximityoftheplanttorawmaterialsandmarkets
Analyselocations/distancesoflimestoneminesAnalyse share of captively generatedpowerandcostingforthesameAnalysethepowerscenariointheregiontoassesswhetheritisapowersurplus/shortageregionReview locations and distances ofthermal power plants and steel plantsfor availability of fly ash and slag,respectively
Precarious financial positionWhatisthenetworth?Whatisthedebttoequityratioofthecompany?Hasthedebtbeenrestructured?Has there been a referencemade to/scheme of arrangementsanctioned by the Board for Industrial and FinancialRestructuring(BIFR)?
ManycompanieshadcomeunderthepurviewoftheBIFRandwerebeingforcedtoacceptdifficulttermsandconditionsonrestructuringorfaceatakeoverofmanagementHowever,withanincreaseincementpricesinthelast2years,manyofthesecompaniesare now operating under the restructuringschemesofBIFR
AnalysenetworthpositionUnderstand key terms and conditionsof the restructuring arrangement tounderstandrestrictivecovenants
Fixed assetsHas the company capitalised itsassetsasperIndianGAAP?Has it tested the assets forimpairment?
The company may have capitalised coststhat are not allowed to be capitalised asper Indian GAAP. This could lead to lowerexpenses charged to the income statementaswell as a possibility of non-allowabilityof such expenses while calculating taxdepreciationThereispossibilityofnon-utilisationoffullcapacity.TestingofassetsforimpairmentisanimportantaspectinsuchcasesOwnership of assets could be with theCompanyorGroupcompaniesCompanymighthavegiven/takenassetsonleaseDumpers/ vehicles used to transportlimestone from the mines to the primarycrusher have significantly higher wear andtearcomparedtonormalvehicles/dumpers.Depreciation on such assets needs to bechecked
Analyselocations/distancesoflimestoneminesAnalyse share of captively generatedpowerandcostingforthesameAnalysethepowerscenariointheregiontoassesswhetheritisapowersurplus/shortageregionReview locations and distances ofthermal power plants and steel plantsfor availability of fly ash and slag,respectively
InventoriesAre the inventories properlyvalued?Are there any slow/non-movinginventories?
Cementplantsplanproductioninsuchawaythat minimal finished goods (bagged) andworkinprogress(clinker) is instockduringmonsoonsGiven the volatility in cement prices andthe frequent price changes announced bymanufacturers, it is important that costof finished goods are compared to marketprice (mark to market) to assess need forprovisioningCement plants in India are forced to stockcertaincritical sparesduetotheir locationin remotepartsof India.Highvalue spareswhichmay not be used for long periods oftimealsohaveashelflifeandmayneedtobe replaced TheinventoryvaluationpoliciesmaynotbeinlinewithIndianGAAPThere may have been a change in theinventoryvaluationpoliciesTheremaybeslow/nonemovinginventories.Provisions may be required to write thesedowntotheirnetrealisablevalue
Checkforanyclinkerorfinishedcementin stock that has been affected by themonsoonsCheck assessment of high value spareslyingunutilised,andprovisioningdoneinrespectthereofAnalyse the age of the inventory andenquire into any non-salable/obsoleteinventory. Comment on impact onprovisioningforinventoryComment on the inventory valuationpolicyofthecompanyPerform a technical due diligence toassessqualityofsparesinstock
RECENT M&A TRANSACTIONS:
Year Target Name Acquirer Name
Deal Value (INR Millions)
Percentage acquired (%) Remarks
Dec2012
CalcomCementIndiaLtd.
DalmiaCementBharatLimited
2,380 50%DalmiaCementacquiredupto50%stakeinAssambasedCalcomCementIndia,whichhasa0.99mmtpaclinkerisationunitand1.72mmtpacementgrindingunitinAssam.
Jan 2012
CalcomCementIndiaLtd.
DalmiaCementBharatLimited
772 26% DalmiaCementincreaseditsstakeinCalcomCementIndiaLtd.byadding26%tothealreadyowned50%stake.
Sept2012
AdhunikCementLimited
DalmiaCementBharatLimited
5600 100% AdhunikCement,aJVbetweenAdhunikGroupandMSPgrouphadinvestedINR7,000millionforsettingup1.5milliontonecementplantinlimestone-richJaintiahillsofMeghalaya.
July2012
GotanLimeStoneKhanijUdyogPvt.Ltd.
UltratechCement N/A 100%
UltratechCementisapartoftheUSD24.5billiondiversifiedIndianconglomerateAdityaBirlaGroup.Thecompanyalongwithitssubsidiarieshasanannualcapacityof52milliontonneofcementmanufacturing.
Nov2011
SmallTilesPvt.Ltd.
PrismCement N/A 50% H&RJohnson(India)adivisionofPrismCementsLtdacquired50%stakein
SmallTilesPvt.Ltd.,supplierofglazedtiles.
Nov2011
AndhraCementsLtd.
JaypeeDevelopmentCorporation Ltd.
5,837 N/AGPGoenkaGroupenteredintoadealwithJaypeeGroup’ssubsidiaryJaypeeDevelopmentCorporationLtd.tosellacontrollingstakeinAndhraCementsLtd.
Dec2011
AmbujaCementsLtd. HolcimLtd. N/A >50%
HolcimacquiredmanagementcontrolofAmbujaCementLtd.(ACL)in2006anditheldalittleover46percentequityinthecompanybeforethisacquisition.HolcimhasincreaseditsstakeinACLbyaround4%toover50%throughopenmarkettransactions.ACL’spresentcapacityisabout25milliontoneswithfiveintegratedcementplantsandeightgrindingunitsinIndia.
Feb 2011
BirlaCementIndustriesLtd.
RainCommoditiesLtd.
N/A 100%
RainCommoditieshasacquiredBirlaCementandIndustriesfromYashBirlaGroup.RainCommodities,togetherwithitssubsidiaries,isengagedinthemanufactureandsaleofcementinIndiaandInternationally.Thecompanymarketscementunderthe“PriyaCement”BrandInAndhraPradesh,KarnatakaandTamilNadu.
Source: Bloomberg and dealcurry.com
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