All You Need To Know About Nirma Group’s Nuvoco Vistas IPO

Keeping pace with the initial public offering (IPO) rush, Nirma Group's Nuvoco Vistas has launched its IPO on the Indian stock market.

Nuvoco Vista is a part of the Nirma group which has interests in detergent manufacturing, healthcare products, and real-estate. The group forayed into the cement business with a Greenfield cement plant in Nimbol, followed by the acquisition of Lafarge-Holcim and NU Vista leading to the current capacity of 22.3 million tonnes per annum.

NVCL is the fifth-largest Indian cement manufacturer, with a capacity share of approximately 17 per cent in terms of consolidated capacity in east India and a capacity share of approximately 4.7 per cent in terms of consolidated capacity in north India.

The company operates 11 plants across India, with eight based in the east and the rest three located in the north. It has also acquired limestone mines across the country in order to secure its raw material. Like other cement companies, NVCL too has lowered its dependence on external power by developing solar power plants of 1.5 MW, waste heat recovery systems of 44.7 MW and captive generation capacity of 105 MW.

Together, these internal power sources contribute to 50 per cent of the company’s power requirement. So far, the company has grown through acquisitions, which has added to the debt burden. The money raised through the IPO would be used to pay back debt and for other general corporate purposes.

For financial years (FYs) 2021, 2020 and 2019, the total capacity utilisation of all its plants across India, calculated based on total production capacity, was 77.57 per cent, 90.05 per cent and 92.99 per cent respectively.

However, the new acquisitions have been underutilised, which combined with high debt expenses have resulted in net losses for the company.

Further, rising commodity prices have put negative pressure on the margins — the cost of imported petroleum coke (pet-coke), a key raw material used as fuel, has more than doubled to around $150 per tonne on a year-on-year basis.

This steep surge is a result of higher sea freight and supply-side constraints. Also, prices of international coal (which is an alternate to pet coke) have gone up by 35-40 per cent as compared to the first half of the last year touching around $100 per tonne.

When compared to peers, Nuvoco scores much lesser on financial parameters. Realisation per tonne is much lower than the industry average. Operating profit per tonne is also lower than its peers for the company.

In addition, the high debt has also lowered the capital employed. Net debt to EBIDTA for the company stands at around 4.5x whereas several of its peers are net debt free or have a small amount of debt.

The company would be valued at around 17x enterprise value to EBIDTA, post-IPO. Several industry peers, that are also profitable at the net-level, trade at similar or lower valuations.

According to publicly available data, Shree Cement trades at 23.86 times its EV/FY2021 EBITDA, JK Cement trades at 15 times its EV/FY2021 EBITDA, Ultratech trades at 17.47 times its EV/FY2021 EBITDA and India Cement trades at 10.96 times its EV/FY2021 EBITDA. Therefore, the valuations might be at a higher level when considering the industry valuations.

Key Risks

Cyclical Nature Of The Business

The company's operates in the construction and infrastructure sector in India and demand for its products is largely dependent on the output of the construction and real estate industries. The performance of these sectors is influenced by the general economic conditions prevalent in India. A slowdown in the Indian economy could adversely affect the company's business. The infrastructure sector is the first sector to be affected by an infrastructure crisis and usually the last to recover.

Margin Pressure:

The company has lower realisations than the industry average according to the DRHP. With rising commodity prices, the company faces operating margin pressures. High interest expenses combined with low capacity utilisation of new acquisitions have driven margins further lower. The company’s debt has also lowered margins, but the debt situation should improve as the company will be using the funds raised in the IPO to pay back debt.

Regulatory Changes:

The recently enacted mines and minerals (Development and Regulation) Amendment Act, 2021 (Amendment Act) may result in lapsing of letters of intent for the grant of mining leases. The lapse of mining leases would impact the raw material security of the company.

The company has valuations similar to its stronger peers. However, given the IPO frenzy, the IPO might offer listing gains according to analysts.