Emami sells cement biz to Nirma. What it means for the stock and sector?

Shares of Emami Ltd gained 2.6 per cent to Rs 311.1 on the BSE on Friday after the company announced its decision to sell its entire stake in group company -- Emami Cement. The Kolkata-based diversified conglomerate announced on Thursday that it had entered into a binding agreement with Nuvoco Vistas Corp, part of the Nirma group, for divesting its 100 per cent equity stake in Emami Cement for an enterprise value of Rs 5,500 crore. 

At 10:47 am, Emami was trading little changed at Rs 302.35 on the BSE, as against a 0.27 per cent decline in the benchmark S&P BSE Sensex. Other group companies, Emami Paper Mills and Emami Realty were locked in the upper circuit band of 5 per cent at Rs 101 and Rs 64.85.  

The transaction is subject to the customary approvals including from the Competition Commission and is expected to be consummated in next 3-4 months, the company said in its regulatory filing. READ FILING HERE

A clutch of companies — Shree Cement, Dalmia Bharat Cement, UltraTech, and Ambuja Cement — and private equity investors were understood to have evinced an interest in acquiring Emami Cement. The company operates an integrated cement plant and three grinding units with a cement grinding capacity of around 8.3 million tonnes per annum.

"The deal improves consolidation in the eastern region with the top-6 cement players now controlling ~80 per cent capacity, which is positive for the longer-term pricing outlook. Near-term, however, we expect pricing to remain muted in the East given the ~25% capacity expansion in the next 18 months, which we believe would create a fight for market share," wrote analysts at Motilal Oswal Financial Services in a report.

OUTLOOK FOR EMAMI

In August 2019, Emami Group had announced its plans to pare its entire debt at the group level, and was mulling various options, including divestment, asset monetisation, and launching initial public offer (IPO).

"Emami's decision to consolidate its business and sell all the non-core businesses is the right move in the right direction. It's better to have few profitable businesses that create wealth for sharehoders, rather than loss-making entities," says Gaurang Shah, head investment strategist at Geojit Financial Services.

Echoing similar views, AK Prabhakar, head of research at IDBI Capital, says that Emami being a core fast moving consumer goods (FMCG) company should focus on its core competencies and try to gain market share.

"While the transaction is positive for the Group, its prospects aren't very promising in the near future... It's market share isn't growing, just like peer firms such as Marico or Dabur. Therefore, I wouldn't advise investors to buy Emami at this point in time as there is no growth visible in the near future," he adds.

In December last year, Emami Cement had filed for its IPO with market regulator Securities and Exchange Board of India (Sebi) to issue fresh equity shares worth Rs 500 crore, while another Rs 500 crore worth of shares, belonging to the promoter group, will be sold in the IPO, the draft red herring prospectus (DHRP) said. 

With the latest development, however, the road ahead for the IPO is ambiguous for now. Prabhakar of IDBI Capital further adds that now with the ownership changing at Emami Cement, the call to go-ahead with the IPO rests completely with the new owners.

"The market already has many players in the market for cement... I don't think investors need another company to put their money into," he quips.

"According to the DRHP filing in Oct'18, Emami Cement had weak profitability of Rs 500/t EBITDA (including Rs 150/t incentives) in 1QFY19, despite achieving nearly 100 per cent clinker utilization. We believe that this was due to (a) weaker volume mix (trade sales of only ~63%), and (b) lower trade realizations (v/s Category A players) as it is still establishing its brand (Emami Double Bull) and higher operating costs, particularly for freight (likely due to higher lead distance)," noted analysts at MOFS. 

INVESTMENT STRATEGY FOR CEMENT SECTOR

After proposals under the Union Budget for 2020-21, and pick up in cement prices post monsoon, analysts are bullish on the sector and advise to stick to select large and mid-cap cement counters.

"While there are no specific budget announcements pertaining to the cement industry, demand for the commodity will pick up due to infrastructure, housing and rural development related announcements," wrote analysts at CARE Ratings in a Budget review note. 

Among key proposals, the National Infrastructure Pipeline (NIP), encompassing 6500 projects with an allocation of Rs 102 lakh crore across housing, irrigation, airports, railways etc, and accelerated development of highways over the next two-three years would be positive for the sector.

"During 9MFY2020, the cement industry witnessed marginal growth in cement production of 0.7 per cent YoY owing to muted government spending on the infrastructure sector and tight liquidity environment. However, the sector maintained healthy pricing disciple with pan-India cement price for Q4FY2020TD treading higher by 5.6 per cent/2.5 per cent as against Q4FY2019/Q3FY2020. We expect the kick start of government-led infrastructure investments and continued impetus given on the affordable housing segment to aid in positive business outlook for cement companies going ahead," wrote analysts at Sharekhan in a recent sector report.

They added: We maintain our Positive view on the sector, believing it to be in a multi-year upcycle, as we expect government’s sustained thrust on infrastructure investment and affordable housing to improve profitability aided by favourable demand, pricing and cost environment. They maintain 'Buy' rating on UltraTech and Ramco Cements and have 'Positive' view on JK Lakshmi Cement. 

Analysts at Prabhudas Lilladher, meanwhile, bank on the allocation to road (highway) sector worth over Rs 91,000 crore in the Budget for FY21 to support 6-7 pr cent growth in cement demand for 2020-21. UltraTech Cement remains their top pick.

At the bourses, Heidelberg Cement gained 3.4 per cent in the intra-day trade today, followed by Ambuja Cement (2 per cent), UltraTech Cement (1.7 per cent), and India Cement (1.5 per cent).