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Emami scouting buyers for its cement assets

Valuations could be a stumbling block

* According to media reports (The Economic Times), Dalmia Bharat (DBL) has submitted an initial expression of interest (EoI) to acquire the cement business of Emami. Reportedly, the Emami Group has also been in discussions for the same with UltraTech and a few others.

* Emami Cement operates three cement plants in East India with total capacity of 5.6MMTPA (clinker 3.2MMTPA), which is being expanded to ~9MMTPA, implying 10% capacity share in East India. The company also has limestone mine leases in Guntur (Andhra Pradesh) and near Jaipur (Rajasthan), which are undeveloped. Emami Cement had earlier filed for an initial public offering (IPO) to raise INR10b (INR5b – fresh issuance; INR5b – offer for sale by promoters), but it is currently on the backburner.

* While media reports indicate that Emami is looking for an enterprise value (EV) of >INR60b, we believe that it could be a stumbling block as it would imply an asset valuation of ~USD140/t – a ~30% premium to replacement value.

* We do not expect Dalmia to bid aggressively, if at all, for Emami Cement as it will increase its dependence further on the East India market. It already has ~40% capacity in the East; post the on-going 8MMTPA expansion (at INR30b capex), its total capacity in the East would rise to 54%. Therefore, acquiring Emami would increase its capacity mix in East to 63%. At the same time, its net debt would rise to ~INR90b with net debt/ EBITDA of ~3.5x, thus, making it vulnerable to any demand slowdown or higher competitive intensity in the East.

 

Valuation of INR60b implies ~30% premium to replacement cost

* Assuming an EV of INR60b for Emami Cement would imply a valuation of USD137/t for the operating cement capacities of 5.6MMTPA, after netting off ~INR7b for capital work in progress (CWIP) for the Kalinganagar (Odisha) grinding unit and the limestone leases. This would be a ~30% premium to the replacement cost of comparable capacity.

* According to the DRHP filing in Oct'18, Emami Cement had a weak profitability of INR500/t EBITDA (including INR150/t incentives) in 1QFY19, despite achieving ~100% clinker utilization. We believe this is due to (a) weaker volume mix (trade sales of only ~63%), and (b) lower trade realizations (v/s Category A players) as it is in the process of establishing its brand (Emami Double Bull) and higher operating costs, particularly for freight (likely due to higher lead distance).

 

Clinker shortfall to limit utilization ramp-up for Emami

* We believe that Emami Cement will fall short of clinker for its planned grinding unit expansions (Kalinganagar and Bhabua) as its current capacity already implies cement to clinker (CC) ratio of 1.75x as against its 1QFY19 (Apr-June'18) operating rate of 1.4x. Moreover, its limestone mine has a remaining life of 30 years, which will not support any clinker capacity expansion in our view.

* This implies that even at 100% clinker utilization, it is unlikely to achieve utilization of >60% for its planned cement capacity of ~9MMTPA.

 

Dalmia Bharat unlikely to bid aggressive for the asset

* Dalmia Bharat’s capacity is slated to expand from current levels of 26mt to 34.3mt by FY22 led by announced expansion plan of 8MMTPA in East India at capex of INR30b. While it has also received NCLT order for Murli Industries in the West, the transaction is subject to fulfilment of other conditions related to revival of mines and grant of GST incentives.

* It already has ~40% of its capacity in the East; post the on-going 8MMTPA expansion, the same would rise to 54%. Acquiring Emami would increase its capacity mix in the East to 63%. At the same time, net debt would rise to ~INR90b with net debt/ EBITDA of ~3.5x, thus, making it vulnerable to any demand slowdown or higher competitive intensity in the East.

* Moreover, Dalmia’s capacity share in the East will rise to >20% once its capacity expansion is complete. Therefore, its acquisition of Emami Cement could be challenged by the Competition Commission of India (CCI) as the deal would take its capacity share in the East to ~30%.

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