Nirma Group cement arm Nuvoco’s IPO gets thumbs up from brokers
Nuvoco Vistas Corporation, India’s fifth-largest cement producer that was created after Nirma Group acquired Lafarge India’s assets in 2017, opened its public issue on Monday to raise Rs 3,562.5 crore.
Nuvoco is competing for investor attention with three other companies – automobile marketplace CarTrade, mortgage lender Aptus Value Housing and chemicals maker Chemplast Sanmar – that are hitting the primary market this week. While CarTrade also opened its IPO on Monday, the other two are opening their issues on Tuesday.
Nuvoco’s IPO, the largest among the four, has fetched a ‘buy’ rating from brokers given the optimistic growth outlook for the cement sector and the fairly priced issue that leaves a scope of appreciation after listing.
The company raised Rs 1,500 crore on Saturday in an anchor allotment that shrunk the overall issue size of around Rs 5,000 crore. Notably, more than 90% of the anchor book was subscribed by long-only funds. This means at least a quarter of the overall issue has been picked up by investors who are not looking at a listing pop to dump the shares.
The promoter group led by Karsanbhai Patel, best known for the detergent label Nirma, is looking to divest shares worth Rs 3,500 crore while the company would see an infusion of Rs 1,500 crore through the fresh issue. Nuvoco will use a bulk of the fresh issue proceeds to repay loans and clean up its balance sheet.
The company’s total revenue rose just over 10% to Rs 7,522.6 crore last year but its net profit of Rs 249.25 crore in FY20 turned into a net loss of Rs 25.91 crore loss for the year through March 2021. Moreover, a slowdown in construction with the second wave of the Covid-19 pandemic affected its sales in the April-May 2021 period, though the company said that demand revived the following month.
Nuvoco has about a dozen cement plants spread across West Bengal, Bihar, Odisha, Chhattisgarh and Jharkhand in eastern India, besides Rajasthan and Haryana in north India. It also has 49 ready-mix concrete plants across India.
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Antique Stock Broking:
The brokerage has noted that the company toned down its valuation expectation since the time it filed the draft red herring prospectus (DRHP) and is now eyeing a market capitalisation of Rs 20,400 crore.
“The target valuations have significantly tapered down from those (May) levels. The tapered down market-cap implies 18-19 times FY21 EV/EBITDA and 9.5-11.5 times FY22-FY23 EV/EBITDA, which appears fairly priced, given the exuberance in the sectoral peers. Larger peers are trading at 10.5-18.5 times at FY23 EV/EBITDA,” it said.
The brokerage, however, added the key risk for the company is the geographical concentration of business in eastern India and any price correction in the region.
“Nuvoco is looking for an organic expansion of 2.7 MTPA (12% addition) in eastern India over FY22 and FY23. We understand at the upper band, Nuvoco IPO is priced at EV/tonne of $131. That valuation is at a discount to its large cap peers at 12-19 times FY23 EV/EBITDA. This discount, however, partially factors a high debt on its books – net debt/EBITDA of 4.5 times FY21, and also a low ROCE," according to IDBI Capital.
“But given the upcycle in the cement industry and expectation of margin improvement and balance sheet deleveraging over FY21-23, we recommend a 'subscribe' rating to the issue,” it added.
Anand Rathi has a ‘subscribe for long term’ rating on the IPO. It is bullish on the firm due to its planned expansion, debt repayment plan and cost-reduction initiatives.
Nuvoco had previously increased its cement capacity to 22 million tonne per annum (mtpa) in FY21 from just 2.5 mtpa in FY16. Much of this was due to acquisitions led by Lafarge’s local assets.
The brokerage noted that Nuvoco’s recent financial performance has been tepid. “However, with a strong focus on improving margins and positive industry growth prospects, we have a positive view for the long term,” it added.
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