Cement sector M&As lie stalled over valuation

Suresh P Iyengar Mumbai | Updated on January 19, 2018

Most sellers are expecting a valuation of $160 a tonne which becomes too expensive given the current demandsupply situation SHUTTERSTOCK IMAGE

Lull in demand, bar on transfer of captive mines during sale put firms in a tight spot

A spate of merger and acquisition deals in the stressed cement sector hangs in balance over the valuation and difficulty in transfer of captive mines along with sale of assets.

The new Mines and Minerals (Development and Regulation) Act, 2015 does not allow transfer of captive limestone mining when assets are sold to prospective buyers.

Speaking to Business Line Deepak Khetrapal, MD and CEO, Orient Cement said some of the companies which are highly leveraged are finding it difficult to sustain with the slowing cement demand leading to tight cash flow.

Banks are also putting pressure on defaulters, especially after RBI allowed banks to swap debt for majority stake in defaulting companies and sell them to prospective bidders.

“The last four quarters was very bad for the industry and the hope for revival in cement demand still continues,” he said.

Reliance Cement has been in the market for last three months to sell its 5.8 million tonne per annum cement plant in Maharashtra for an enterprise value of about `5,000 crore. Lafarge bid to sell its 5.5 million tonne plant to Birla Corporation for `5,000 crore is stuck since last August with no clarity on transfer of limestone mining lease along with the plant.

Similarly, Kumar Mangalam Birla-owned UltraTech Cement has sought clarification from Government on transfer of limestone mining lease. Last January, the company agreed to acquire JP Associates’ 4.7 mtpa cement plant and allied assets in Madhya Pradesh for `5,300 crore.

The issue of transfer of mining lease does not arise if the acquired cement plant is retained as a subsidiary, said Khetrapal. Unfortunately, he added, it becomes expensive to retain the identity of acquired company as fungibility of cash flow becomes an issue. The debt servicing needs to be done by the subsidiary company itself and there will also be no tax benefit for the parent company, he said.

Vikram Dhawan, Director, Equentis Capital said a flurry of deals in the cement sector was expected on the back of revival in demand from infrastructure and real estate sectors which continue to languish.

“We do not expect any major deals for next two years with excess supply putting pressure on valuations,” he added.

Khetrapal said most sellers are expecting a valuation of $160 a tonne which becomes too expensive given the current demand-supply situation.

Anything around $145-150 a tonne is reasonable price for a good profitable company with adequate raw material back up given the fact that a new cement plant would require an investment of about $120 a tonne and five years to become operational, he added.

“We ourselves are looking at some of the assets put on the block as we want to diversify our market presence from South India,” he said.

Published on January 12, 2016

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