Samruddhi Cement

Investors with a two-three year perspective can buy the stock of Samruddhi Cement Limited (Rs 475)- the demerged cement business of Grasim Industries that listed on the bourses last week.

The stock is a value pick within the cement sector, given its moderate valuation, control over the northern market, and low leverage that gives it the scalability to expand and add capacities.



Samruddhi Cement will soon be merged with UltraTech Cement, also an Aditya Birla Group company, at the announced swap ratio of 7:4. Shareholders of Samruddhi Cement can hold the stock as it trades at a discount to the price warranted by the swap ratio (UltraTech's current market price would warrant a price of Rs 507 per share for Samruddhi).

Post-merger, the combined entity (48.8 million tonnes) will become the single largest cement manufacturer in the country with an all-India presence.

With a significant pie of the northern cement market, Grasim's cement business did better (despatches up 15 per cent vs all-India average 12 per cent) than most of the other frontline cement companies in the last one year.

At an estimated enterprise value (EV) of Rs 5800/tonne ($125/tonne), the stock of Samruddhi Cement is at a modest valuation; peers are trading at an EV band of Rs 6000-8000 a tonne.

Strong points for merger

In 2009-10, though players of the South showed a lacklustre performance with correction in prices, the northern players did well with improved prices on tight supply conditions. UltraTech Cement, which is now a predominant player in the West and southern market, will gain access to markets of the North after its merger with Samruddhi Cement. UltraTech Cement will have a close to 20 per cent share of the grey cement market in India, post the merger.

Operating efficiency

The merger is also likely to be earnings accretive. Though UltraTech Cement's share capital will expand by 120 per cent with a fresh issue of 14.95 crore shares, earnings growth will be considerable enough to make the deal value-accretive.

The combined entity's PAT will stand 140 per cent higher than the standalone PAT of UltraTech Cement (calculated based on FY-10 profit figures). The earnings per share will stand around Rs 97; higher by Rs 10 per share for the present set of UltraTech shareholders.

The merged entity may be also be among the more efficient cement producers in the country.

For FY-10, Grasim Industries' standalone numbers showed net profit margin improve by four percentage points to 19 per cent.

UltraTech did not fare up to the mark of Grasim as its realisations were hit badly by drop in cement prices in the South. Prices in the South were on an average down by around Rs 20-30/bag in the year.

At the operating level, there has been a significant saving, particularly in fuel costs. Thanks to the higher drawing from captive thermal power plants for the power needs. As a percentage of sales, power costs for UltraTech Cement dipped to 20 per cent in FY-10 from 27 per cent in FY-09. Grasim Industries made a two percentage point saving (power costs as a percentage of sales dropped to 16 per cent from 18 per cent).

The combined captive power capacity of UltraTech Cement and Samruddhi Cement will stand at 504 MW post-merger; 268 MW from Samruddhi Cement.

On the raw material front, most of the manufacturers in the industry including UltraTech Cement have however been seeing increase in costs with prices of limestone, gypsum and coal going up.

Capex plans

Post the commissioning of the 3.1-million tonne grinding unit at Kotpuli, Rajasthan, in the March quarter, the combined capacity (with the UltraTech Cement) of the company stands at 48.8 mtpa.

The company intends to spend Rs 4475 crore over the next two years in capex activities for the cement business.

The debt-to-equity ratio of UltraTech Cement is 0.34 (outstanding loans as of end-FY10 is Rs 1605 crore).

The debt that will move with Samruddhi Cement to UltraTech Cement is estimated around Rs 2,500 crore; with equity too expanding, the burden of debt will not be significant (The debt-to-equity ratio of the combined entity will be less than 0.5).

Sector prospects

The cement despatches growth in 2009-10 was encouraging at 12 per cent compared with the previous year's 9.5-10 per cent.

What is of concern is the huge addition to supplies following capacity expansion in the industry. According to an industry estimate, 48 million tonnes of capacity was added in FY-10, which has led to 29 million tonnes of fresh production.

The sector though might see flat prices for cement (or even some correction) in the near term; offtake will, after a blip (due to closure of construction activities for the Common Wealth games and monsoon), recover as construction activities catch up and metro railway work commences in most states.


via BL