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The stock of Nuvoco Vistas Corporation, the cement manufacturing business of the Nirma group, made a weak debut in the stock markets today. Despite positioning itself as the country’s fifth largest cement manufacturer, the company’s initial public offer saw weak investor interest. While the overall issue was subscribed 1.71 times, much of the show was led by Qualified Institutional Buyers (QIB). The portion available for QIB was subscribed 4.23 times, whereas, non-institutional and retail investors subscribed only 0.66 and 0.73 times of their respective reserved portions in the offer.
The company listed at a 17 per cent discount to its issue price of ₹570 apiece on the BSE today. However, recouping much of the losses, the stock touched an intra-day high of ₹550.
At its issue price the company was valued at an EV/EBITDA of about 18 times (FY21). UltraTech Cement and Shree Cements trade at a premium valuation of 20-25 times EV/EBITDA, given their best-in-class metrics and large size. Other large listed peers such as ACC, Ambuja and Dalmia Bharat trade at about 13 times EV/EBITDA, even after having demonstrated a better track record of profits in the past.
At the current price of ₹530.35, the stock trades at an EV/EBITDA of 17.4 times. Considering Nuvoco’s past performance (net losses in two of the last three years), and volatile cement prices in the East which could delay the pending synergy gains from recent acquisitions, the valuations don’t seem justified.
Promoters gain, investors lose
The IPO included a 23 per cent stake sale by the promoter entity (Niyogi Enterprises), amounting to ₹3,500 crore and a fresh issue for ₹1,500 crore (to be used to pare Nuvoco’s debt). Considering the recent rights issue to the said promoter where about 6 crore shares were issued at ₹220 a piece in June and July 2020, Niyogi Enterprises has more than doubled their money through this IPO in just a year’s time.
However, the investors of the IPO, the listing price came as a bummer.
Even at the current valuations, Nuvoco seems expensive. This is because, the company is yet to demonstrate improving operating metrics (EBITDA) and cash out on the synergies from its recent acquisitions (Emami plants acquired in 2020).
Moreover, we feel the synergies on its recent acquisition may take a couple more years to fructify, given its heavy reliance on East (78 per cent of its installed capacity) --- where it is also the market leader by a slight margin.
Until then, listed peers with higher capacities, diversified geographical reach, more experienced management (Nuvoco in the industry for 7 years, growing inorganically) and better operational metrics can offer relatively better value for long-term investors at their current valuations.
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