Nuvoco Vistas Corporation coming with an IPO to raise upto Rs 3563 crore

Nuvoco Vistas Corporation

• Nuvoco Vistas Corporation is coming out with a 100% book building; initial public offering (IPO) of 6,25,00,001 shares of Rs 10 each in a price band Rs 560-570 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on August 09, 2021 and will close on August 11, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 56 times of its face value on the lower side and 57 times on the higher side.
• Book running lead manager to the issue are ICICI Securities, Axis Capital, HSBC Securities and Capital Markets (India), J.P.Morgan India and SBI Capital Markets.
• Compliance Officer for the issue is Shruta Sanghavi. 

Profile of the company

The company is the fifth largest cement company in India and the largest cement company in East India in terms of capacity. As of December 31, 2020, its cement production capacity constituted approximately 4.2% of total cement capacity in India, 17% of total cement capacity in East India and 5% of total cement capacity in North India, and it is one of the leading ready-mix concrete manufacturers in India. The company’s Cement Plants are strategically located with road and rail connectivity to its key markets of East India and North India. Its plants are also located in proximity to its limestone reserves and other raw materials, such as slag and fly ash. It transport clinker from its integrated cement plants to its grinding units via rail and road. Gypsum, coal, slag and pet coke, which are essential raw materials for the manufacture of cement and generation of power for its captive power plants, are sourced via rail and road. It has captive railway sidings at six of its plants, these give it a significant competitive advantage in transporting raw materials and finished products from these plants.

The company distributes its products through the trade segment, which mainly caters to individual home buyers (Trade Segment), and the non-trade segment, which is mainly via direct sales to institutional and bulk buyers. Its focus is on the Trade Segment, where its distribution channels are a mix of wholesale and retail dealers and a sub-dealer network. It has developed strong relationships with its channel partners over the years and built a loyal base of customers across its operational markets with the aim to achieve both its customers’ and its own growth objectives. It operates through a range of distribution channels and direct sales to improve its reach to customers.

Proceed is being used for:

• Repayment/prepayment/redemption, in full or part, of certain borrowings availed of by the company.
• General corporate purposes.

Industry overview

Domestic cement demand grew at a moderate pace of 5% CAGR over Fiscal 2015 and Fiscal 2020, following the demand for and construction of infrastructure and affordable housing. In fact, majority of this growth was seen during Fiscal 2018 and 2019 on the back of pre-election spend. Demand for domestic cement witnessed a fall in Fiscal 2020 that continued into Fiscal 2021 due to the disruptive effects of the pandemic. During 2019 to 2020 cement demand witnessed a fall of about 2% in 2020 after witnessing two years of stellar growth (around 12% in Fiscal 2019 and around 9% in Fiscal 2018). Demand experienced negative growth of 0.5 to 1% in the first half of the year largely due to macroeconomic weakness.

A slowdown in infrastructure spending on both Central and State side adversely impacted demand, along with several external factors like heavy monsoons and its delayed withdrawal, the fallout resulting from the Andhra Pradesh state government cancelling the state-wide infrastructure projects, sand unavailability issues in many states (especially the southern states like AP-Telangana). Labour shortage due to the general election, water scarcity in several states like Bihar, Tamil Nadu and Odisha also impacted demand. However, the second half of the year witnessed marginal revival in demand following the release of pent-up demand and a pickup in central capex funding, which worked to limit demand decline to approximately 2% for the year.

In 2020 to 2021E cement demand is expected to fall once more in Fiscal 2021 after a modest dip in Fiscal 2020 as the cement industry witnesses a tumultuous transition between the two fiscal years. Cement demand is expected to fall by 0 to 2% on-year in Fiscal 2021 due to production shutdowns, stalled construction activities and mass exodus of labour following the fear of the pandemic spread in Q1FY21. Supply chain and labour issues due to extended local lockdowns led to a demand de-growth of 30 to 31%, though pent-up and pre-monsoon construction demand in May and early June cushioned any further decline in Q1FY21. The cement industry was surprised with moderate demand growth of 3 to 4% on a year-on-year basis in the seasonally weak monsoon period of June to September. This was majorly driven by pent-up post-monsoon construction demand in September amid the return of migrant labourers and easing COVID-19 restrictions in urban settlements.

Pros and strengths

Largest cement manufacturing company in East India: The company is the largest cement manufacturer in East India and the fifth largest cement manufacturer in India in terms of capacity. It has a capacity share of approximately 17% in terms of consolidated capacity in East India. It also has a capacity share of approximately 4.7% in terms of consolidated capacity in North India. With a consolidated capacity of 22.32 MMTPA, it own 4.2% of the industry’s installed capacity in India as of December 2020.  The location of its plants allows it to maintain its leadership position in East India while growing its business in North India. East India is the fastest growing cement markets in India. In addition, its cement plants in Chhattisgarh and Rajasthan are ideally placed to serve the adjacent markets of Uttar Pradesh and Madhya Pradesh in Central India and Maharashtra in West India respectively.

Strategically located cement production facilities: The company’s cement plants are located at various strategic locations in East and North India. These locations allow it to effectively sell and market its products in East and North India as well as access to select key markets in Central India. It has three integrated units and five grinding units located in East India, and two integrated units and one blending unit located in North India. It is also in the process of enhancing its cement capacity in its existing grinding units in Jojobera cement plant and Bhabua cement plant in East India. All its units are located within close proximity to the key raw materials required to produce cement, such as limestone, slag and fly ash. Its units are also connected by road and/or rail networks that allow for the easy flow of raw materials and dispatch of finished products to its key markets. Its connectivity to raw materials and to its customers allows it to manufacture and sell its cement products to customers in a cost-efficient manner.

Extensive sales, marketing and distribution network with diversified product portfolio: The company has strong sales, marketing and distribution capabilities in East and North India, and strategic access to some key markets in Central India. This distribution network allows it to effectively target and drive sales within the Trade Segment. As at March 31, 2021, it has 244 CFAs (162 in East India and 82 in North India) and 16,076 dealers in India (10,091 in East India and 5,985 in North India). Its extensive network of warehouses, logistics partners and dealers in East and North India gives it a competitive advantage in its operating regions. It is increasing this network as it ramp up volumes and market penetration.

Strong R&D and technological capabilities: The company place a strong focus on innovation, with an emphasis on developing a comprehensive product range to meet the requirements of its customers, address the gaps in the market and improve its profitability. It has set up the CDIC, its innovation centre located in Mumbai. Through CDIC, it can and has developed new products that address market needs. Some of its innovative products include ready-to-use wet micro concrete for structural strengthening and retrofitting, high-strength, high-density and lightweight concrete (as compared to regular concrete), wet mix cement mortar in bags, quick-setting OPC, fast-bonding adhesive for tile fixing and high-quality wall putty for interior and exterior walls. Its CDIC in Mumbai is accredited by NABL (ISO/IEC 17025: 2017 Standards) which operates a well-equipped facility on an area of 17,500 square feet for developing and prototyping innovative products. Its CDIC has developed a range of innovative products. In India, it has filed patent applications for four of its products, of which one has already been granted.

Risks and concerns

Depends upon continued availability of coal, water, labour and raw materials: The company’s competitiveness, costs and profitability depend, in part, on its ability to source and maintain a stable and sufficient supply of raw materials (such as limestone, gypsum, slag, water and fly ash) and fuel (including coal and pet coke) at acceptable prices. Fuel in the form of diesel and petrol for freight costs is also essential for the operations of its businesses. On a proforma basis, cost of materials consumed represented 13.49% of the proforma revenue from operations for Fiscal 2021 and power and fuel represented 18.22% of the proforma revenue from operations for Fiscal 2021. It does not own any coal mines for its operations and typically source coal and pet coke from domestic and international suppliers based on purchase orders and fuel supply agreements. Further, some of the fuel supply agreements contain a take-or-pay provisions under which it is required to offtake certain minimum quantity and even if it is unable to offtake such amount, it is required to pay a minimum contracted amount to its suppliers (which can be a substantial expense). 

Operate in highly competitive business environment: The company operate and sell its products in highly competitive markets and competition occurs principally on the basis of price, quality, brand name and technology adoption such as energy efficient technologies, cooling technologies, and waste utilisation technologies. As a result, to remain competitive in its markets, it must continuously strive to manufacture cement and RMX more efficiently by optimizing its costs of production, transportation and distribution on an ongoing basis, and improving its operating efficiencies. It face competition from domestic cement companies which operate in the Indian market, including UltraTech Cement, Shree Cement, Birla Corporation, Dalmia Bharat Cement, Ambuja Cement and other regional players like Wonder.

Depends on select number of suppliers: The company currently rely on a selected number of suppliers to provide part of the required quantities of certain raw materials, including gypsum, fly ash and slag, and coal and pet coke. It has a long-term contract for the supply of slag, a long-term agreement for coal and long-term contracts for the supply of fly ash. These long-term agreements meet a part of its supply requirements. Apart from those contracts, it does not have other long-term agreements with suppliers, and the loss of one or more of its significant suppliers or a reduction in the amount of raw materials it obtain from them could have an adverse effect on its business, results of operations, financial condition and cash flows. Its reliance on a select group of suppliers may also constrain its ability to negotiate its arrangements, which may have an impact on its profit margins and financial performance.

Business is subject to seasonal variations: The Indian cement industry is cyclical and seasonal in nature. In recent years, cement prices and profitability of cement manufacturers have fluctuated significantly in India, determined by overall supply and demand. A number of factors influence supply and demand for cement, including production overcapacity, general economic conditions, in particular activity levels in certain key sectors such as housing and construction, the company’s competitors’ actions and local, state and central government policies, which in turn affect the prices and margins that it and other Indian cement manufacturers can realise. Excess production capacity in the market has been one of the major factors impacting the Indian cement market. Such excess capacity in cement production has in the past had a direct impact on the price at which it can sell its cement and the margins that it realise. The long lead time required to add or expand capacity in the cement industry has also led to supply/demand imbalances.

Outlook

Incorporated in 1999, Nuvoco Vista Corporation, a part of Nirma Group Company is among one of the largest cement companies and concrete manufacturers in India. It offers a diversified range of products such as cement, Ready-mix Concrete (RMX), and modern building materials i.e. adhesives, wall putty, dry plaster, cover blocks, and more. Its Cement Plants are located at various strategic locations in East and North India. These locations allow it to effectively sell and market its products in East and North India as well as access to select key markets in Central India. It has strong sales, marketing and distribution capabilities in East and North India, and strategic access to some key markets in Central India. It also has a well-qualified senior management team with experience across all functions of the building materials industry. On the concern side, the company’s business requires working capital for activities including purchase of raw materials, for its limestone mining operations as well as for the purchase of packing materials for its cement and RMX products. Its business is dependent on adequate and uninterrupted availability of electrical power and water. It may also face certain risks with regard to the operation of its captive power plants. Any shortages or any prolonged interruption of power and water or increase in the cost of power, could adversely affect its business, result of operations and financial condition. 

The issue has been offered in a price band of Rs 560-570 per equity share. The aggregate size of the offer is around Rs 3500 crore to Rs 3562.50 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 10.14% from Rs 68,299.44 million for Fiscal 2020 to Rs 75,226.93 million for Fiscal 2021. It had a loss of Rs 259.19 million for Fiscal 2021 as compared to a profit of Rs 2,492.55 million for Fiscal 2020. The company intends to leverage its existing manufacturing facilities and distribution network to capitalise on the expected demand for cement products from its customers. The company is in the process of adopting a multiple price point strategy using its expanded product portfolio, including the ‘Double Bull’ brands. It intends to include products at multiple price points in its product portfolio to combat the competitive pressures from brands of other manufacturers, and service customers from different demographic categories. It is in the process of business integration at various levels focused on its employees and business processes, to ensure uniformity and rationalisation of its products and services.