Should you invest in Nuvoco Vistas IPO?

Investors can give the IPO of Nuvoco Vistas Corporation (Nuvoco) a miss. While the company is the fifth largest cement manufacturer in terms of installed capacity, the asking price seems expensive given that the company is yet to demonstrate improving operating metrics (EBITDA) and cash out on the synergies from its recent acquisitions. Moreover, we feel the synergies on its recent acquisition may take a couple more years to fructify, given its heavy reliance on East (78 per cent of its installed capacity) --- where it is also the market leader by a slight margin. Until then, listed peers with higher capacities, diversified geographical reach, more experienced management (Nuvoco in the industry for 7 years, growing inorganically) and better operational metrics can offer relatively better value for long-term investors at their current valuations.

The IPO includes a 23 per cent stake sale by the promoter entity (Niyogi Enterprises), amounting to ₹3,500 crore and a fresh issue for ₹1,500 crore ( to pare debt). Considering the recent rights issue to the said promoter where about 6 crore shares were issued at ₹220 a piece in June and July 2020, Niyogi Enterprises is set to more than double their money through this IPO in just a year’s time.

Peers offer better value

At a price band of ₹560-570, the company is valued at an EV/EBITDA of about 18 times (FY21). UltraTech Cement and Shree Cements trade at a premium valuation of 20- 25 times EV/EBITDA, given their best-in-class metrics and large size. Other large listed peers such as ACC, Ambuja and Dalmia Bharat trade at about 13 times EV/EBITDA, even after having demonstrated a better track record of profits in the past.

Considering Nuvoco’s past performance (net losses in two of the last three years), and volatile cement prices in the East which could delay the pending synergy gains from recent acquisitions, the valuations at the asking price don’t seem justified.

Impending synergies

Through acquisitions, its installed capacity now stands at 22.3 million tonnes per annum (MTPA), and its capacity utilisation has been above 90 per cent in FY19 and FY20. In FY21, however, the utilisation levels dropped to 75 per cent, post acquiring the Emami plants.

While other players ended the year with positive growth in sale volumes, Nuvoco with its concentrated presence in East saw a 4 per cent drop in its cement sale volume.

This is excluding the recently acquired plants of Emami Cement –– now called NU Vista, a wholly owned subsidiary of Nuvoco, from July 2020. In comparison, other top players ended FY21 with 4-7 per cent yoy growth in sale volumes.

Besides, with increasing cement demand lifting realisations and the manufacturers resorting to cost pruning measures, major cement players witnessed healthy EBITDA per tonne in FY21 – greater than ₹1,100 per tonne. However, Nuvoco saw a 11 per cent yoy drop in EBITDA per tonne, from ₹1,083 in FY20 to ₹966 in FY21, due to a 5 per cent drop in realisations to ₹4,639 per tonne.

Going ahead, the company expects its EBITDA levels to rise by achieving operational efficiencies from its recent acquisitions in the form of reduced lead distance, expanding geographical and segmental presence and cross selling of products. That apart, its existing plans of de-bottlenecking and brownfield expansions will further aid in scripting the earnings growth.

However, any reimposition of lockdown and volatile climatic conditions in East may have a bearing on its blended realisations.

Financials

Growth in earnings is key for the company given its huge debt outstanding of ₹6,885 crore, of which ₹1,500 crore will be repaid post the IPO. Besides, the company has planned capex outlay of about ₹550 crore up to FY23 for the de-bottlenecking projects. In FY21, the company’s net debt to EBITDA was at 4.5 times, which could fall to 3.6 times with the IPO proceeds.

In FY21, the company saw a 10 per cent yoy increase in consolidated revenues to ₹7,523 crore owing to Nu Vista acquisition.

The acquisition helped offset the 15.27 per cent drop witnessed in standalone revenues (excluding Nu Vista), due to the pandemic.

However, it also brought with debt i.e. existing loans of Emami, coupled with fresh debt to fund the acquisition.

Hence, with a 58 per cent jump in its consolidated finance costs to ₹664 crore, the company saw a net loss of about ₹26 crore in FY21, compared to a net profit of ₹249 crore last year.

Investors may want to wait and watch the results over a couple of quarters, before entering the stock.