Binani Cements IPO

Binani Cements


Name of the Company: Binani Cements Limited
Sector/Industry: Cement
Issue Size: 2, 05, 00,000. The offer constitutes 10.09% of post offer paid up capital of the company.
Issue Price: Rs 75 - 85
Issue Opens: Monday, May 07, 2007
Issue Closes: Thursday, May 10, 2007
Promoter(s): Binani Industries.
Company Website: http://binaniindustries.com/bil%20subsidiaries/bincement.html
Book Running Lead Manager: ICICI Securities.
Registrar: MCS Limited
IPO Rating: The Company is not proposing for IPO Rating.
Draft Red Herring Prospectus: www.sebi.gov.in/dp/binanidraft.pdf


About the Company: Binani Cements is the flagship company of the Binani Group and has facilities for the manufacture of 2.25 MTPA (million tones per annum) of cement along with 25 MW (Mega Watt) of coal/lignite based captive power plant at Sirohi, Rajasthan. (I have been to Sirohi and it is very close to my ancestor’s village)

The Sirohi facility was set up with the support of Denmark based F.L. Smidth and Larsen & Toubro Ltd., and was completed in 19 months. The Company has two limestone (important raw material for manufacturing cement) mines, namely Amli and Thandiberi, operated on long term lease bases which are at a distance of 2 and 7 Km from the plant respectively. These mines have proven reserves of 195 MnT (million tones) as on April, 2005.

The company’s primary markets are northern states of Rajasthan, Delhi, Harayana, Punjab and Gujarat.

Overview of the Industry in which Binani Cement operates:

India is the second largest cement producer in the world. Healthy CAGR (compounded annual growth rate) of over 8%.

Amongst the lowest per capita consumption in the world at 110 kg. So lot of scope for growth.

Future Demand Drivers
Expected GDP Growth level of > 7% (conservative guidance)
Initiatives for growth of Housing
Development of Roads/Other Infrastructure


Indian Cement Industry has a production capacity of 170 MTPA and running at almost 100% capacity utilization. Right now the situation is in favour of producers since demand is more than supply and till few months back cement producers used this situation to their benefit and had complete control over prices. But now cement industry is on PC’s (P.Chidambaram) inflation control radar and in my opinion cement industry would slowly lose its pricing power. Any opposition by cement players will be dealt with hawkish measures since election season will be beginning soon.

Always experts feel that, the recent capacity additions would be on block by next year and this might create supply glut.

I feel this industry excessively relies on government policies like infrastructure spending, interest rates and tax structure.


Objectives of the Issue:

The issue’s primary objective is to list company shares on the stock exchanges and provide JP Morgan an opportunity to unlock the value of its investment.

It is very clear that the money raised would not go to the company but will be going to JP Morgan who is selling a part of its 25% stake in Binani Cements. Hence for Binani cements this issue does not add much value.


Strengths:

Captive power plants – It has a power plant of 25 MW and another power plant of 40 MW is under construction. This power should be sufficient for the company to be self reliant in terms of
power requirements.

Lime stone reserves – It has limestone reserves of 195 MTPA and it is sufficient for 30 years of cement production at the rate of 5.25 MTPA.

The markets in which the company operates are likely to get an exclusive freight based railway corridor.

Weakness:

High debt to equity ratio of 2.2 and this is three times more than the industry standard. The company would be paying substantial part of profit as interests and most of the loans taken my company are long term.

Small Player – Even after all its planned capacity addition, Binani would have 2.5 – 3% share in the Indian Cement market. I think in commodity business the big you are the better it is. The size brings in lot of economies of scale.

All eggs in the same basket – The Company’s complete production facility is a single location. I think it is a substantial risk considering the fact that Rajasthan is particularly vulnerable to Indo-Pak conflict.



Valuation:

In FY 2007, the company achieved revenues of Rs 680 crores and net profit was 96 crores. This translates into an EPS of Rs 4.7 and the PE ratio for the band of Rs 75 -85 turns out to be 16 – 18.


Price comparison with peers:

Companies of almost the same size of Binani are currently trading at much lower valuation. You can get JK Cement at PE of 8, Madras Cement at PE of 12.9 and Shree Cement at PE of 11. Hence definitely over priced compared to its peers.


Final Verdict:

It is very simple .. DON’T APPLY to this issue. J P Morgan (the seller of these shares) is asking for too much. In Sep 2005, J P Morgan had picked up 25 % of Binani Cements paying 120 crores. With 18 months, it is expecting its 25 % stake to have a valuation in the range of 375 – 425 crores. I agree that in this span of time the fortunes of cement industry has improved but still this kind of ultra high valuations are unjustified. It is a clear case of exploitation of the current bull run.

Don’t apply for this issue and hope J P learns a lesson or two about India’s prudent retail investors.

Sources:

www.sebi.gov.in/dp/binanidraft.pdf

Financial figures copied from ET Investors Guide, May 8, 2007