Hi Friends, this is my 2nd post VP. I learnt about Nuvoco and would like to post some observations here
Nuvoco Vista Corp ltd
MCap: 12K cr
It is the 5th largest cement co in India with an installed capacity of 23.8 MMTPA and the part of the famous Nirma Group.
Before going forward its very important to study roots of the company and the conduct of the promoters.
So First some history of the company.
In 1999, Lafarge India entered in to Cement business with the acq of cement business from TISCO and from Raymond Ltd.
Acq. Ready Mix Concrete business of L&T in 2008 for 1480 cr
Nirchem Cement, a wholly owned sub of Nirma, acquired all the assets of Lafarge India for Rs.9600 cr in 2016.
Name changed to Nuvoco Vista
They acquired NU Vista, Cement business of Emami in 2020 for Rs.5500 crore
Now some history on promoters.
Main person Mr. Hiren Patel: Holds Chem. Eng and MBA from USA. He has been with Nirma group since 1997 and is MD of Nirma Ltd.
He is the son of Karsanbhai Patel (founder of Nirma), who started making low priced detergents and selling them door-to-door and his strategy was a success and the leaders like unilever and P&G felt the heat of this. Today they are the largest producer of Soda Ash.
There was an instance when there was a shortage of sulphuric acid and most players increased prices to Rs.8 but Hiren didn’t want to earn profits the wrong way considering the raw material prices had remained unchanged.
Coming to Cement Business, the group has reached peak in soda ash business and cement is a related diversification since Soda ash is used as a chemical admixture for Portland Cement. It can be used as accelerator for cement hydration when used in low quantity and act as a retarder when used in high Quantity.
They tried to venture this around 12 years back but were stuck in land acquisition related litigation and that’s how they decided to go inorganic route and won bid for Lafarge against the mighty Ajay Piramal and Sajjan Jindal (JSW).
Next time he won the bid for Emami Cement, outbiding Ultratech, Star cement and Ambuja.
The group has been known for being conservative and the proceeds of the ipo 3500 cr OFS goes to pay debt at group level and become debt free whereas 1500 cr primary issue goes to paring down debt of Nuvoco. The timing of the IPO was great he encashed pretty well. Recently they are increasing stake on market fall.
Is this just an another business from Conglomerate? Its imp to have promoter’s active involvement in the business we own. It should be 1st (preferably) or 2nd in his priority list.
Hiren bhai is MD of Nirma, and Chairman of Nuvoco so these would be his primary area of focus. Others like Niyogi (an investment arm) and others are not that big.
Cement Industry Observations
Industry was impacted negatively due to steep rise in raw materials. This impacted everyone’s margins.
Price escalation already done by the companies and presently the input cost is reducing and this will help margins going forward but not that much
The whole attempt of getting into this industry is Govt. Focus on Infra which can be seen from below attachment. Do note that its imp not to fall for these narratives. These are no doubt points to consider but certainly not the point to take decisions.
Industry is witnessing a lot of CAPEX. ACC and Ambuja has targetted doubling the capacity by 2028. They both account for around 67.5 MTPA to 140 MTPA making them no. 1. This is big, esp when they said that all of it will be done from INTERNAL ACCRUALS. Presently Ultratech has 127 MTPA.
Capital Returns book has a rationale, which is logical, that continuous supply will continuously keep net margins lower.
Valuations
First on assets costing basis, Nuvoco has around 11K cr Fix assets Net (excl Goodwill). Some inventory and cash totalling to 3K cr.
It has debt of around 5.5K cr. Mr. Hiren has said that they plan to reduce debt at 1.5X of EBIDTA (more on that later.) so on net net basis, we are getting at cost.
We can also calc this by EV/MTPA
Top 5 co.
1 Ultratech: 221000/127 = 1740/Ton
2 ACC: 33000/35 = 943
3 Ambuja: 78000/32 = 2437
- Shree: 93000/43.4 = 2142
Whereas Nuvovo: 12000/24 = 500/ton
Here’s a good comparison of various co in VP forum
Now on earning basis. Cement industry as an whole earns around 10% Net margins (top 10 co). And ROCE of around 15% so if I even consider half of it than it will be approx 500 cr (4% of MCAP). Now as they had said 1.2X of EBITDA then avg EBITDA margins would be around 15% presently (remember input cost inflation impacting it) otherwise it would be around higher of 25%. That means they are targeting debt of around 1800 to 2000 crores.That would be approx 3K cr reduction. Thats not easily achievable however if we look at their management ability, Their interest rates increased 120 bps whereas repo increased 225 bps.
So to summarise.
One of the leading cement brand, which has reasonably good prospect, won’t drag excel columns here, backed by govt. Initiatives. However most of their sales in B2C 85%. And are expanding Geographically. Facing near term issues on account of mergers and debt which is expected to go down, but not so soon. And it is available at decent valuations which is my margin of safety. However, competition is getting intense and
I do have holdings in this, recent buys, could be wrong here, and not a reg Inv adv. And this is not any buy/sell advise.
You are welcomed to post your thoughts/reviews/study on this.