Three companies show interest to acquire Emami Group's cement arm

Months after the Rs 20,000-crore Emami Group started scouting for a buyer for its group entity, Emami Cement, at least three major cement producers have elicited interest to buy its assets.

The interest stems from the fact that the cement arm of Emami is a low-cost producer, its assets are new and the firm has huge reserves of limestone, which can boost expansion. The locational advantage in east India is an added incentive.

According to industry officials, in the near future, despite capacity additions in the country’s northern and eastern regions, the demand for cement in these parts is expected to outpace the supply in the next two-three years, leading to a shortage. In turn, prices are expected to firm up.

Emami Cement is currently focussed on east India, with its plants in Risda in Chhattisgarh, Panagarh in West Bengal, and Jajpur in Odisha. It had also acquired 0.60 million tonne per annum (mtpa) capacity from Eco Cement in October 2018 in Bhabua, Bihar, and invested to double the capacity.

“Besides Chhattisgarh, it also has mining rights in Rajasthan and Andhra Pradesh, which can help in future expansion,” said Khushbu Lakhotia, associate director at India Ratings & Research.

According to Lakhotia, the mining rights presents the buyer with an opportunity to scale up operations as the need be in other locations. The strategic mining rights, if used, can strengthen the production capacity of the acquirer. 

Rating agency Acuite Ratings & Research, in its report, noted that Emami Cement’s limestone reserves in Chhattisgarh are sufficient not only to meet the requirements of the integrated manufacturing facility at Risda but can also cater to the requirements of the plant in Panagarh and the upcoming unit in Odisha. 

For instance, Birla Corporation, which intends to become a 25-mtpa company, is also leveraging on Reliance Cement’s mining rights (which it acquired) to expand operations in Maharashtra.

On the other hand, industry officials noted that production cost at Emami Cement is one of the lowest in the industry, as it is able to maintain consistent quality levels. “Its margins have been low because it is a new player and thus had lower realisations, but it would increase along with increasing volume... Its profits are also expected to improve further”, Lakhotia said.

According to a report from India Ratings & Research, the leverage is likely to remain elevated due to an estimated capex of Rs 460 crore on the Odisha and the Bihar projects.

“The net leverage is currently high as the company is on a capex mode to expand its capacity, but additional Ebitda (earnings before interest, tax, depreciation and amortization)  is likely to reduce the leverage gradually”, she added.

The debt-equity position of the company, according to Acuite, is estimated to remain in the range of 3.20 times to 3.00 times because of the ongoing capex. When contacted, Aditya Agarwal, director at the Emami Group, refused to comment. Emami Cement had a total debt of Rs 2,246.76 crore as on March 31, 2018, which comprises Rs 2,093.86 crore as secured term loan from banks and financial institutions, and Rs 152.90 crore as working capital borrowings from banks.

Acuite noted that its revenues have grown significantly to Rs 989.25 crore in 2017-18 on account of an increase in cement realisation due to improved product demand. 

The operating profit improved to Rs 71.81 crore for 2017-18, as against negative operating profit in 2016-17 on account of high discounts offered to the dealers.

Trade sources stated that backed by increased sales volume, Emami Cement’s realisations are expected to improve the most in West Bengal and Bihar, where the company earns better realisations than in Chhattisgarh.