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MOSL: CEMENT-Emami scouting buyers for its cement assets; Valuations could be a stumbling block

CEMENT: Emami scouting buyers for its cement assets; Valuations could be a stumbling block

 

• According to media reports (The Economic Times), Dalmia Bharat (DBL) has submitted an initial expression of interest (EoI) to acquire the cement business of Emami. Reportedly, the Emami Group has also been in discussions for the same with UltraTech and a few others.
• Emami Cement operates three cement plants in East India with total capacity of 5.6MMTPA (clinker 3.2MMTPA), which is being expanded to ~9MMTPA, implying 10% capacity share in East India. The company also has limestone mine leases in Guntur (Andhra Pradesh) and near Jaipur (Rajasthan), which are undeveloped. Emami Cement had earlier filed for an initial public offering (IPO) to raise INR10b (INR5b - fresh issuance; INR5b - offer for sale by promoters), but it is currently on the backburner.
• While media reports indicate that Emami is looking for an enterprise value (EV) of >INR60b, we believe that it could be a stumbling block as it would imply an asset valuation of ~USD140/t - a ~30% premium to replacement value.
• We do not expect Dalmia to bid aggressively, if at all, for Emami Cement as it will increase its dependence further on the East India market. It already has ~40% capacity in the East; post the on-going 8MMTPA expansion (at INR30b capex), its total capacity in the East would rise to 54%. Therefore, acquiring Emami would increase its capacity mix in East to 63%. At the same time, its net debt would rise to ~INR90b with net debt/ EBITDA of ~3.5x, thus, making it vulnerable to any demand slowdown or higher competitive intensity in the East.