Binani Cement, a subsidiary of Binani Industries, was promoted by Braj Binani. The company currently operates a 2.25 million-tonne per annum (mtpa) cement plant along with a 25-MW coal/lignite-based captive power plant (CPP) at Sirohi, Rajasthan. End June 2006, the company had a market share of 13% in Rajasthan and 7% in Gujarat. Around 45% of its dispatches are to the Rajasthan market.
One of the current shareholders of Binani Cement, JP Morgan Special Situations (Mauritius), is coming out with an offer for sale for its 10.09% stake (20,500,000 equity shares of Rs. 10 each) in company. Post-IPO, it will hold a 14.91% stake. J P Morgan Special Situations (Mauritius) had invested Rs 120 crore (at around Rs 24 per share) to purchase of equity shares in September 2005 and has extended a term loan of Rs 130 crore for the expansion of cement capacity.
Strengths
- 3.05 mtpa of cement capacity is likely to come on stream in May 2007. This will increase cement capacity to 5.3 mtpa, from 2.25 mtpa. The company has already begun trial runs. The capacity is likely to fully stabilise by Q2 (September 2007) of FY 2008.
- The captive power capacity (CPP) will be increased by 44.6 MW in two phases: 22.3 MW each by June 2007 and October 2007. CPP will be sufficient to meet the power requirement of Binani Cement, which is buying 25%-30% of its power requirement from the grid at Rs 4.55 per unit. The variable cost of power was Rs 2.1 per unit in the nine months ended December 2006. After considering fixed cost such as depreciation, the company is likely to save Re 1 per unit. At 100% capacity utilisation, the total power requirement is 170 million kwh. Thus, the saving would be about Rs 4.25 crore – Rs 5.1 crore.
- The Ministry of Coal has allocated the Nimbri Chandavan lignite block to Binani Cement for captive mining for the captive power plant in Sirohi. The lignite block is likely to have reserves to meet 35 years of the company’s requirement. It is expecting a saving of 30% when the lignite mine becomes operational.
- Binani Cement had a blending ratio of 48% in FY 2007 (compared with 77% in the northern region in April 2006-February 2007). It is targeting to increase this to 60%. Higher proportion of blended cement will result in better margin as cost of production of blended cement is lower.
Weaknesses
- The northern region where the company operates is likely to witness the highest amount of capacity additions. Apart from Binani Cement’s capacity addition, another nine mtpa (Mangalam cement 0.5 mtpa, Shree Cement three mtpa, JP Associate 4.5 mtpa, Ambuja Cements 0.5 mtpa, JK Lakshmi 0.5 mtpa) of capacity is scheduled to come on stream in FY 2008 and another 13 million tonnes (Grasim eight mtpa, JP Associate two mtpa, Ambuja Cements three mtpa) in FY 2009. In Q4 (March ending) FY 2007, Shree Cement’s 1.5-mtpa capacity and JK Lakshmi’s 0.5-mtpa capacity have come on stream. ACC has commenced the trial run for its 0.9-mtpa capacity at Lakheri. The current size of the northern market is about 32.06 mtpa (FY 2008 dispatches). Delay in capacity addition and time requirement for capacity addition to stabilise and intra-region movement in cement is likely to extend the current cement cycle up to end of FY 2008. However, supply is likely to exceed demand, putting pressure on price realisation from FY 2009.
- On account of pressure from the Union government, the cement industry agreed that it will not hike prices for a year. Thus, Binani Cement may not be able to pass on any increase in cost to customers. As the company is increasing its installed cement capacity by about 136%, the lead distance to the market may increase. This may increase freight cost. Besides, the proportion of sales to institutional clients may increase, reducing net realisation and blocking the company’s funds on account of credit given to them. Currently, institutional sales form negligible proportion of its total sales.
- Binani Cement is currently selling cement in Gujarat. Indian cement is mainly exported from Gujarat. Prices of cement in Gujarat may come under pressure if the government decide to ban exports.
- The Binani group’s financial track record has not been good.
Valuation
As per a share-swap scheme, shareholders of Binani Industries are expected to get shares of Binani Cement from the shares held by Binani Industries in Binani Cement. This will release additional 9% equity to the floating stock of the company.
At the price band of Rs 75 – Rs 85, the P/E range works out to 15.9 – 18.1, respectively, on FY 2007 EPS on post-issue equity, enterprise value (EV)/tonne (on expanded capacity) US$ 95 and US$ 104, and EV/earning before interest, depreciation, tax and amortisation (EBIDTA) of 9.2 and 10.1. JK Lakshmi with a cement plant at Sirohi is currently trading at P/E of only 3.9 times annualised nine months earnings, EV/tonne US$ 77 (on expanded capacity) and EV/EBIDTA (annualised) 5.6. The TTM P/E of Cement- North India is about 12.1 after sharp corrections in cement companies’ share prices due to number of negative developments for the industry in recent months.