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OCL India + Dalmia Bharat | Special Situation Opportunity

Dalmia Cement (Bharat) Limited (DCBL), ~85% owned by Dalmia Bharat Limited (a listed firm) and ~15% by PE fund KKR has made a disclosure to the stock exchanges on 16th Feb, 2015 regarding its intention to acquire of 26.7% equity shares of OCL India Limited (listed entity) at any time after 4 working days from the date of the notice.

As on date, DCBL already owns 48% equity shares of OCL India Limited and is classified as one of the promoters.

The acquisition of above mentioned 26.7% by DCBL is also from a promoter group headed by MH Dalmia.

Therefore the above transaction is being highlighted as inter- se transfer and the disclosure to stock exchange is an intention to seek exemption from an open offer.

Quick Facts

OCL has its cement manufacturing capacities in the eastern India (the region has a stable demand a supply dynamics) and has been consistently profitable. Company has recently expanded its cement capacity from 5.4 to 6.7 MTPA.

Financials a 9M FY15, Rev a Rs. 1560 Cr and PAT a Rs. 78 Cr

MCAP a Rs. ~3300 Cr, CMP 575

Company seems quite well placed and can be gauged from couple of research reports attached.

Shareholding a Promoters 74.93%, Others a 25.07%

Dalmia Bharat Limited is one of the oldest cement manufacturers in India and owns 85% in DCBL (15% by KKR), which has cement manufacturing capacities primarily in South totaling 11.5 MTPA. DCBL also owns 100% in Calcom Cement (3.1 MTPA), 76% in Adhunik Cement (1.5 MTPA) and 100% in Jaypee Bokaro (2.1 MTPA).

Total Capacity 18.2 MTPA.

With above transaction, OCL will become a subsidiary and total capacity of DCBL will swell to 24.9 MTPA.

(Some of the capacity is under expansion and is poised to complete by FY15 end)

Financials a 9M FY15, Rev a 2200 Cr and Loss a Rs. 100 Cr

MCAP a Rs. ~3900 Cr, CMP a 465

Clearly dampening immediate result and curtailed financial history in a cyclical business makes it difficult to analyse.

Special Situation + Interesting Viewpoints

W.r.t OCL Shareholders

)- The acquisition price of shares cannot exceed Rs. 725 and the minimum threshold is Rs. 580.

)- So it depends on promoters decision but what we need to arrive at - will it be at armas length / commercial nature of negotiation will prevail or not.

)- Little homework tells me that though the transaction is within promoters but there are two different families involved. So, each party will work for its best interest and the transaction price should be somewhere in between the above range. Also since DCBL is engaged wherein KKR has a 15% direct stake a I do not doubt the commercial nature of the transaction.

)- Bad point is, in most probability there would be no open offer. There can also be a chance that they might not get the exemption for open offer (although remotely).

)- Good points are, there will be strong benchmarking of the OCL share price and can be a base for any further rerating due to merger and/or delisting and/or any corporate action or even might be due to its own performance (which looks quite robust)

W.r.t Dalmia Bharat Limited

)- I believe this is where the meatier action should prevail. Company has literally graduated from a regional player to the top 5 pan-India cement player but valuation lags (both due to its performance and corporate structure)

)- Some homework tells that focus clearly is on value unlocking on the corporate side and efficiency on the operational side.

-Valuation will appear lumpy on conventional matrix, but when put in terms of capacity and prospect better sense prevail.

)- Coverage in both the counters is limited, one might expect rapid price actions once the transaction catches public glare

)- Combination of value accretion due to corporate action, performance and undervaluation seems to be at work

)- Running the company through the usual parameters, keeping the corporate action aside

  • Growth a Macro driven, capacity in place,

Prospect seems good in East + Central India, neutral in South and subsidy aided in North East

  • Profitability a Volume driven, Focus on efficiency and costing, have access to captive raw materials and power (refer concall transcripts and AR)

  • Capital Mix a Heavy on Debt but no further capex, future FCFF to aid in debt reduction, OCL consolidation will give immediate boost to financials

  • Management a Decent, Established and importantly Ambitious. Adherence to corporate governace + KKR

  • Returns and Capital Intensity a No doubt itas a cyclical business, returns compressed as on date but any uptick in general trend should directly feed returns

  • Risk a Timing of upshot in general Demand, Cash flow mismatch etc.

Risks

  • Promoter does not go ahead with the corporate action (although less likely as it is being contemplated since long but no formal announcement has ever been made)

  • Donat know if any of the company is bidding in the ongoing coal auctions and any impact thereof

Refer the below link for couple of Research reports on OCL, Dalmia and notice to stock exchange which I could fish out from the internet for ready reckoner.

https://www.dropbox.com/sh/5ip8ccue8hojmg1/AAB4W4zSCq82bzVvyfupJIOFa?dl=0

https://www.dropbox.com/sh/yeq8szig0lara1m/AACjFoMt6tfbuIdvkaecIZoxa?dl=0

https://www.dropbox.com/s/mrbt1vo5z9dr8le/OCL_India_160215_SAST_by%20Dalmia%20Bharat.pdf?n=390225598

Request for other members view on the same. In my sense OCL has a good short term prospect whereas Dalmia scores on medium to short term.

Best

Mayank

Dear All,

Updating the thread as the first leg of the above mentioned Special situation has fructified. Hope it will act as a good repository for such corporate actions in future.

On 25 Feb, 2014 i.e. 9 days after the disclosure - DCBL has acquired the 26.7% stake in OCL at a price of ~Rs. 675 (1000+ Cr transaction on BSE, exact details to be available after the todayâs trading action).

The deal price has been in accordance to my expectations as mentioned in the above post i.e. Rs.100 premium to the price prevailing on 19th Feb. Now letâs see what further announcement comes for merger/delisting/open offer etc in OCL.

But I think we should see some action in Dalmia Bharat first. Some back of the envelope calculation for further analysis:

MCAP of Dalmia â ~Rs. 4000 Cr

Value of ~74% stake in OCL (Dalmia now being the holding company) - ~Rs. 2500 Cr

So, in short we are getting 18.2 MTPA of cement capacity for ~Rs. 1500 Cr (plus of course the debt and ignoring the holding company discount).

Best

Mayank

Hi Mayank,

Interesting position situation from Dalmiya Bharat holders. Please help me by throwing some light on

  1. Dalima’s were already promoters on OCL (48%). So it seems while valuation calculation a double dip happened and factored 74% OCL stake.

  2. OCL share transfer happened above prevailing market rate (~Rs 100 per). So it should not add value to Dalmiya Bharat but dent it.

  3. Dalmiya Bharat may have taken financial obligations for this transaction. with -ve free cash flow how Dalmiya Bharat should be factoring it.

Hi Gaurav,

Didn’t get your first query.

Your perspective is absolutely correct with the next two points, would just like to throw a bit more colour on it.

The deal happened at a fair valuation, as per my interaction with various industry sources but what attracts our attention is the bigger picture i.e.

)- With 48% stake, dalmia (the listed company) has no control over it (as there were 2 families involved). Now there is an absolute control over the OCL entity - it was like dead investment coming alive. In short, financial statements will reflect the true ability of the asset owned.

)- It gives Dalmia the status of close to a Pan-India cement player. As on date, East India market is the most robust cement market and the same is reflective in OCL performance. Valuations enjoyed by Pan-India players like ACC, Ambuja, Ultratech are consistent and at present is ~3x BV FY16. Dalmia goes on 1.1x on the same metric.Shree Cement goes at 7x, but is an outlier wrt to its performance.

)- W.r.t additional financial obligation, there are two solace factors a) OCL is a FCFF generating company and is expected to increase the ante going forward due to added capacity, which would now be available to Dalmia (subject to merger) b) Even Dalmia’s own cash requirements has peaked out and expect a lot of cash accrual due to Depreciation on added capacity in the next 3 years. Having said that, debt will be one of the major risk to watch out for going forward.

Feel free to revert with your views.

Hi Mayank,

  1. My first query is that Dalmiya’s were already holding 48% of OCL, which is already factored in their CMP.They have increased stake by 26%, so for back of envelope calculation we should only consider 900 cr (i.e. 26% of OCL mcap).

  2. OCl and Dalmiya are debt loaded. And FCF comparison of OCL & Dalmiya doesn’t givevery +ve image too.

OCL bedt/Equity = 0.4, free cash flow = Rs 500 cr

Dalmiya india debt/Equity = 1.2, free cash flow = -Rs3600 cr

  1. Coudn’t find any previous turnaround story for Dalmiya.

Any idea when the trading of Dalmia bharat will start again once the amalgamation with Odisha cement limited is completed? currently 28th nov onwards, it is suspended

Why is there no Annual Report for OCL India for 2017-2018?

I just checked the NSE and BSE websites. Odisha Cement Limited has got listed on both BSE and NSE (I guess on 21st December 2018)

https://www.bseindia.com/stock-share-price/odisha-cement-ltd/oclindia/542216/
https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=OCLINDIA&illiquid=0&smeFlag=0&itpFlag=0#

Also they have declared a dividend of Rs 1.7/share and shareholders of OCL India who got their resultant shares in Odisha cement Limited are entitled to this dividend. And thereafter they plan to split these shares from Rs 10 each to Rs 2 each.


They have come out with one for the merged entity.