Corporate Front: M & A, Can India Cements Cement its Rights?

CORPORATE FRONT: M & A
Can India Cements Cement its Rights?

Strapped for cash, the cement major has to excite a languid stockmarket to pull off an ambitious acquisition.

By R Sridharan

N Srinivasan It's the M&A equivalent of the morning after. Actually, it was only in the afternoon of October 7, 1998, that the Rs 927.30-crore India Cements received the go-ahead for its Rs 160-crore rights issue from the Securities and Exchange Board of India. That was sweet music to the ears of N. Srinivasan, the 53-year-old CEO of India Cements and the Rs 392.56-crore Raasi Cement. Just 4 months after inking deals worth Rs 400 crore to acquire the Hyderabad-based company, Srinivasan is discovering that big is beautiful--but paying the bill for it is not.

For, India Cements' financials have been stretched taut by its acquisition of Raasi Cement. To make matters worse, the company has overshot its repayments deadline even as it avariciously eyes the Rs 159-crore Sri Vishnu Cement, which is controlled by B.V. Raju, the former CEO of Raasi Cement. In February, 1998, India Cements galvanised the stockmarket by offering an average price of Rs 300 to pick up 90.71 per cent of Raasi Cement's equity. Of the acquisition cost of Rs 400 crore, India Cements has already paid half--Rs 180 crore from long-term borrowings and Rs 20 crore from the sale of a company-owned ship--to Raasi Cement's shareholders.

Now, India Cements is hoping to bridge the gap through the rights issue, which will open in mid-December, 1998. Priced at Rs 25, it is being issued at a ratio of 1:1, and will double the company's equity base to Rs 128.66 crore. And Srinivasan says he will generate the remaining Rs 40 crore by selling off one of his ships and hiving off the sugar division. However, for all practical purposes, the company's financial future is now linked to the very stockmarket, languid as ever, it had pleased a little while ago. While Srinivasan was not available for comment, V.M. Mohan, 41, General Manager (Corporate Finance), India Cements, spoke to BT. "We are confident of tying up our funds," he says.

He has to. Thanks to its M&A spree over the last 2 years, India Cements (plus Raasi Cement) is the country's second-largest cement-producer today, with an effective capacity of 7 million tonnes per annum. However, the bills for this distinction are weighing down its balance-sheet. The company has borrowings of Rs 1,027 crore, of which nearly half--Rs 490 crore--came during 1997-98. Post-rights, that translates into a debt-equity ratio of 1.62, making India Cements the most leveraged among the large cement companies in the country (after ACC, which has a debt-equity ratio of 1.55).

No wonder India Cements' interest costs shot up from Rs 48.41 crore to Rs 84.89 crore, crunching the bottomline to Rs 62.63 crore in 1997-98 (Rs 82.54 crore the previous year). And its Earning Per Share (EPS) for the year ended March 31, 1998, was Rs 9.73 on an equity base of Rs 64.33 crore. Points out Mohan: "Cement prices were depressed for a better part of the year, which squeezed our margins." However, even if India Cements maintains its net profit levels in the current fiscal, post rights, its EPS will drop to Rs 5.26. And even that might be a stretch target. Going by its Q-1 1998-99 results--where an interest outgo of Rs 26.91 crore compared unfavourably with the previous year's Rs 83.77 crore--the company's net profits are likely to slide.

So, India Cements has to pull off the rights issue. No wonder a company with a book value of Rs 75 has priced its issue at a third of that. At the moment, the scrip quotes at Rs 34 on the Bombay Stock Exchange, making the rights issue profitable for shareholders--for now. Says Mohan: "We don't mind the pricing because it is our existing shareholders who will benefit from it." But will they play along?

Apart from the financial institutions' 37 per cent stake, Foreign Institutional Investors (FIIs) hold 17 per cent of India Cements' equity, the promoters control 35 per cent, and the public has the remaining 11 per cent. BT learns that the issue-pricing was decided after discussions with the financial institutions, which are led by the Industrial Development Bank of India. While they did not speak to BT, it can be assumed that India Cements has been prudent enough to get their support for the rights issue too.

If so, and given the pricing of the issue, the FIIs will subscribe to the rights. While DSP Merrill Lynch, the lead managers to the rights issue, refused to comment, a Mumbai-based analyst warns: "At the moment, no fund manager wants an exposure in cement companies." And if a part of the public renounces its rights--as may happen--the promoters (which includes the Rs 453.98 crore Chemplast Sanmar) will increase their stake in India Cements by bringing in their own funds. Warns Manish Srivatsava, 29, Analyst, SSKI: "If the rights issue is not successful, then India Cements might end up reporting a loss in 1998-99."

On the other hand, if all goes well, India Cements will use the money to settle its dues with the financial institutions, to whom it owes Rs 150 crore. Thereafter, India Cements--which is in the process of mopping up the remaining 9 per cent of Raasi Cement's stake from the public--can initiate the merger of Raasi Cement into itself, which it plans to put into place retroactively with effect from April 1, 1998. Says Mohan: "Just one good year--and the company will be in velvet."

That's because the post-merger India Cements would have Rs 1,400 crore in sales and Rs 80 crore in earnings (see table). Assuming a swap ratio of 1 India Cements share for 6 shares of Raasi Cement, the post-merger company's EPS would go up to Rs 5.26, and the debt-equity ratio will marginally fall to 1.62. Moreover, the company could push up earnings by rationalising the companies' 3,000-strong workforce besides attacking administrative costs, and reaping synergies in marketing and freight-contracts. In fact, India Cements plans to offer a voluntary retirement scheme to 1,000 workers over the next 3 months.

Then again, India Cements' 2,500 stockists and Raasi Cement's 1,000 are primarily located in the South, a relatively capacity-deficient market. Although Larsen & Toubro's 1.75-million tonnes per annum (tpa) plant at Tadapatri (Andhra Pradesh) is already on-stream, and Zuari Cement's 1-million tpa capacity-expansion in Cudappah is on schedule to be completed by February, 1999, the southern market is riding on the back of robust demand. In all, India Cements' marketshare there has gone up from 13.13 to 21.92 per cent. Warns Srivastava: "I don't expect cement prices to sustain themselves in the South, particularly with l&t and Grasim getting aggressive."

Apart from increasing the efficiency of its cement plants--particularly the older ones at Sankarnagar and Sankri--India Cements must also exit from its unrelated businesses. One reason why it is highly geared is its shipping division, which, as on March 31, 1998, had secured loans of Rs 62.12 crore. Srinivasan now proposes to hive off the shipping division into a separate company, which will not result in any cash-flows, but will save on interest costs.

Assuming an annual interest cost of 15 per cent on borrowings, India Cements will save Rs 9 crore per annum. Another big-ticket foray that the company is getting out of is sugar. Its fully-owned subsidiary, icl Sugars, had begun work on a 2,500 tonnes crushed per day (TCD) unit at Mandya (Karnataka) last year, and has already invested Rs 15 crore of the planned Rs 80 crore. This project will now be put on the block.

There's more restructuring to do, though. When Raasi Cement is brought into India Cements, with it will come its paper and ceramics divisions, both of which are loss-makers. In addition, India Cements will acquire 3 loss-making subsidiaries: the Rs 11.07-crore ICL Foundries (accumulated losses: Rs 6.40 crore), the Rs 26.24-crore Industrial Chemicals & Monomers (Rs 3.57 crore), and ICL Securities (Rs 60,265). Divesting these businesses will help the company by bringing in funds to retire its expensive debt. For now, the fate of its rights is crucial to cement India Cements' ambitious acquisition.

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