Investors can consider taking exposure in the book-built initial public offering of Binani Cement. The offer is being made in the price band of Rs 75-85 per share. The proposed expansion in production capacity, prudent shift in the product mix, and the prospect of consolidation in a fragmented cement space are positives linked to this offer.
However, the downside stems from the highly competitive Northern and Western markets, with established players calling the shot in terms of pricing and brand power, indifferent past record of governance in the Binani group and the recent cap imposed by the government on cement prices for a year.
Binani Cement is a well-established player, with 2.25 million tonnes of cement capacity along with 25 MW coal/lignite based captive power plant at Sirohi, Rajasthan. It is in the process of expanding its capacity of cement to 5.3 million tonnes. Since it is servicing the high growth States of Rajasthan, Delhi, Punjab, and Haryana, in the North and Gujarat in the West, the step-up in capacity should be easily absorbed by buoyant demand in these markets.
The policy environment for the cement sector has turned somewhat murky in the past few months, with government intervention. Despite a disturbing policy environment, our invest recommendation is predicated on three key variables:
Expansion in capacity: The enhanced capacity of 3.1 million tonnes likely to be commissioned by mid-2007 will be absorbed in the high-growth Northern and Western markets. Since the cement demand-supply gap is likely to widen over the next two years, even without any significant pricing upside, volume growth and strong operating margins can keep the company's performance and, in turn, its stock on a stable footing.
As a part of its expansion in capacity, Binani Cement has increased its clinker capacity by 2.3 million tonnes and is also expected to add another 44.6 MW plant over the next few months. The entire expansion programme is expected to cost Rs 575-600 crore and, post-expansion, the debt-equity will be 1.47:1.
Shift in product mix: In tune with the overall demand, Binani Cement has consistently shifted its product mix away for OPC (Ordinary Portland Cement) used for construction purposes towards PPC (Pozzolona Portland Cement) suitable for infrastructure requirements such as building dams and barrages. PPC basically mixes fly-ash from thermal power stations with clinker in producing this cement. Between 2004-05 and 2006-07, the PPC:OPC mix has shifted from 29:71 to 51:49. Post-expansion, it is expected that this proportion will shift to 60:40 in favour of PPC.
Valuation: Based on the 2006-07 per share earnings, the price-earnings multiple of Binani Cement works out to 15-18 times at the lower and upper end of the price band. We will be comfortable if the offer price is fixed at the lower end of the band.
While this valuation is significantly higher than established peers such as ACC, Gujarat Ambuja Cement, Grasim or Shree Cement, which vary between 10 and 14 times, two key elements have to be borne in mind.
One, its operating profit margin is in line with its established peers. In 2006-07, the operating margin improved to 34.2 per cent from 27.7 per cent the previous year. With its proposed expansion, it will be able to keep its margins in this band. Two, considering the fragmented state of the cement industry, there is scope for further consolidation within the cement industry. Though the top five players command a market share of over 45 per cent in 2006, there are over 20 cement players with capacities less than two million tonnes.
With multinational players such as Lafarge, Holcim, Italcementi and Heidelberg establishing a base in the country, relatively smaller cement players may enjoy a consolidation premium.
Offer details: The listing of Binani Cement will be through an offer for sale by JP Morgan Special Situations (Mauritius) of 2.05 crore shares in a price band of Rs 75-85 per share.
The offer constitutes 10.09 per cent of the post offer equity stake of the company. The book-running lead manager is ICICI Securities. The offer opens on May 7 and closes on May 10.