Nuvoco Vistas IPO review (May apply)

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Review By Dilip Davda on August 4, 2021

•    NVCL is the 5th largest cement company from Nirma group, in India.
•    70% of the issue is a secondary offer.
•    For the last three fiscals, it has posted inconsistent performance.
•    Based on negative earnings for FY21, P/E is unascertainable.
•    It's a pure long term story considering rising fancy for cement scrip.

PREFACE:
While we are witnessing sheer madness for loss-making startup unicorns and also the hush-hush entry of many IPOs as they want to make hay when the sun is shining, we are meeting with highly-priced offers. The mad rush seen for startup unicorns is unprecedented and only time will tell as to the maturity of our markets for such offers.

Amidst such a scenario, we have a mega IPO from Nirma group cement venture Nuvoco Vistas that has made losses for the FY19 and FY21 and having negative EPS for the latest financial year. Despite losses, it has allocated 50% for QIBs, 15% for HNIS AND 35% for retail investors. No doubt due to parentage, this issue has become the talk of the town, and perhaps due to such fancy, it is trying to milk the cow. Its positive NAV is mostly on account of hefty premiums collected for equity issuance. Yes, cement sector counters have become the darling of investors across the board due to mega spending lined up for infrastructural and affordable housing complexes. NVCL being a mega player in the region of its main plant posed for bright prospects going forward.

ABOUT COMPANY:
Nuvoco Vistas Corporation Ltd.  (NVCL) is the fifth largest cement company in India and the largest cement company in East India in terms of capacity. (Source: CRISIL Report). 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 is one of the leading ready-mix concrete manufacturers in India (Source: CRISIL Report).

The company is promoted by Dr Karsanbhai K. Patel, who is a successful entrepreneur and is associated with the Nirma Group. The Nirma Group is a diversified conglomerate that manufactures products ranging from chemicals to detergents, soaps, healthcare products and real estate development. The Nirma Group forayed into the cement business in 2014 through a greenfield cement plant in Nimbol. Thereafter, as a part of the Nirma Group NVCL has grown the cement businesses, through acquisitions such as the acquisition of the Indian cement business of LafargeHolcim in 2016 and in 2020 by acquiring NU Vista. Earlier, in February 2020, it completed the merger of the cement undertaking of Nirma Limited located at Nimbol, Rajasthan with the Company. The company has grown from being solely cement-based to a building materials company with a vision to 'Build a Safer, Smarter and Sustainable World'.

As of March 31, 2021, it has 11 Cement Plants (eight in East India and three in North India). Its Cement Plants are in the states of West Bengal, Bihar, Odisha, Chhattisgarh and Jharkhand in East India and Rajasthan and Haryana in North India, while RMX Plants are located across India. As of March 31, 2021, its Cement Plants have an installed capacity of 22.32 MMTPA. Three of the company's plants in East India are integrated units and five plants are grinding units. Two plants in North India are integrated units and the third is a blending unit. It has waste heat recovery systems at all integrated plants with a total capacity of 44.7 MW, solar power plants with a total capacity of 1.5 MW and captive power plants with a generation capacity of 105 MW. As of March 31, 2021, these generate 50.43% (on a proforma basis) of its total power requirements.

As of March 31, 2021, NVCL operates 49 RMX Plants which are in key states in India, enhancing its Pan-India presence. The company distributes its products through the trade segment, which mainly caters to individual home buyers, and the non-trade segment, which is mainly via direct sales to institutional and bulk buyers.

The brands under which NVCL sells products include 'Duraguard', 'Duraguard-MF', 'Double Bull', 'Concreto' and 'PSC' (for cement business) and 'Instamix' and 'Artiste' (for RMX business), 'Zero M Poly Rich Wall Putty' and 'Zero M Integrated Water Proofing Compound' (for modern building materials business), are critical to the success of its business as they serve in attracting customers to company's products in preference to those of its competitors. However, various factors, some of which are beyond the company's control, are critical for maintaining and enhancing brands, which may negatively affect brands if not properly managed.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for repayment/prepayment of certain borrowings in full/part (Rs. 1350 cr.) and general corpus fund needs, NVCL is coming out with a maiden IPO of Rs. 5000 cr. (approx. 87719305 shares) comprising fresh equity issue worth Rs. 1500 cr. (approx. 26315796 shares) and an offer for sale (OFS) of Rs. 3500 cr. (approx. 61403509 shares) It has fixed a price band of Rs. 560 - Rs. 570 per share of Rs. 10 each. Minimum application is to be made for 26 shares and in multiples thereon, thereafter. The issue opens for subscription on August 09, 2021, and will close on August 11, 2021. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 24.56% of the post issue paid-up capital of the company. NVCL has allocated 50% for QIBs, 15% for HNIs and 35% for retail investors.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 30 to Rs. 220 between January 2001 and July 2020. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NA, Rs. 212.30 / Rs. 212.30 per share.

Post-IPO, NVCL's current equity capital of Rs. 330.84 cr. will stand enhanced to Rs. 357.16 cr. Based on the upper cap of the price band, the company is looking for a market cap of Rs. 20357.90 cr.

Joint Book Running Lead Managers (BRLMs) to this offer are ICICI Securities Ltd., Axis Capital Ltd., HSBC Securities and Capital Markets (India) Pvt. Ltd., J. P. Morgan India Pvt. Ltd. and SBI Capital Markets Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, NVCL has posted turnover/net profits (loss) of Rs. 7105.89 cr. / Rs. - (26.49) Cr. (FY19), Rs. 6829.94 cr. / Rs. 249.26 cr. (FY20) and Rs. 7522.69 cr. / Rs. - (25.92) cr. (FY21).

For the last three fiscals, NVCL has (on a consolidated basis) posted an average EPS of Rs. 2.83 and an average RoNW of 1.31%. The issue is priced at a P/BV of 2.45 based on its NAV of Rs. 232.43 per share as of March 31, 2021, and at a P/BV of 2.31 based on its post-issue NAV of Rs. 247.05 per share (at the upper cap).

The Price/Earnings (P/E) ratio based on diluted EPS (consolidated) for FY21 of the company is not ascertainable as the EPS is negative. However, if we attribute the last three year's average EPS to fully diluted current equity then the asking price is at a P/E of 201 thus issue is aggressively priced.

COMPARISON WITH LISTED PEERS:
As per the offer documents, NVCL has shown Ultratech Cement, Shree Cement, Ambuja Cement and ACC Ltd. as its listed peers. They are currently trading at a P/E of around 36.41, 45.81, 36.03 and 22.07 (as of August 04, 2021). However, they are not truly comparable on an apple to apple basis.

DIVIDEND POLICY:
The company has not declared any dividend for the last three fiscals preceding the filing of RHP. It will follow a prudent dividend policy post listing based on its financial performances and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
The five BRLMs associated with the offer have handled 37 public offers in the past three years, out of which 11 offers closed below the offer price on the listing date.

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