MULTIBAGGERS: VINAY CEMENT

Ashish Chugh, Investment Advisor

Vinay Cements : Reco Price Rs. 37.65 CMP: Rs.41.50

Vinay Cement is a play on the demand explosion that the Cement deficit market of North East is expected to witness in the years to come. Investors can accumulate the stock at the current levels and on declines.

September 17, 2007
Vinay Cements Ltd.
CMP – Rs. 37.65 BSE Code – 518051

Vinay Cements Ltd. is a cement company with a niche – It is probably the only listed cement company having its manufacturing facilities located in North-Eastern part of the country – a region with very few cement producers; a region which currently imports over 50% of its cement requirements from neighbouring states; a region which has seen little infrastructure development due to various problems it faced in the past including Insurgency and militancy; however things could change in the years to come- with the situation now stabilizing and under control, the region could witness substantially increased infrastructure spending in the years to come and various Hydel Projects, Irrigation, Housing and Road projects being undertaken. Moreover, the region could witness Industrial Activity on account of the fiscal incentives provided by the government vide North East Industrial and Investment Promotion Policy, 2007 for setting up industries in the region.

The capacity expansions and Greenfield units undertaken by Vinay Cement and its subsidiaries augurs well for the future of the company.

Background

Vinay Cements Ltd. is a leading Cement manufacturer in North-East and has its plant located in Cacher Hills in Asom (Assam). The company currently is on an aggressive expansion spree setting up Greenfield projects through subsidiary companies. The group is also consolidating all its Cement business into Vinay Cement by making the other cement companies of the group as subsidiaries of Vinay Cement.

Vinay Cement has a 2.4 lakh ton Cement plant located in Assam. The company sells cement under the brand ‘Vinay’ and enjoys a high brand recall in North East. Promoters hold 75% Equity in the company.

Vinay Cement currently holds stakes in 3 Cement companies which have either cement plants or are implementing Cement projects in North East – these are RCL Cements Ltd., SCL Cements Pvt. Ltd. and Calcom Cement India Ltd.

RCL Cements Ltd. – RCL Cements Ltd. has a 1.0 lakh ton Cement plant. The company has been acquired by Vinay Cement Ltd. in June 07 through a stock swap. Vinay Cement Ltd. has issued 89 lakh shares at Rs.35 per share to the shareholders of RCL Cements Ltd. towards sale consideration for the shares held by them in RCL Cements Ltd. With this, RCL Cement has now become a 100% subsidiary of Vinay Cement. With the allotment of shares of Vinay Cement to the shareholders of RCL Cement, the promoters holding in Vinay Cement has increased from 52.65% to 74.95%, thereby triggering an Open Offer as per SEBI Guidelines.

RCL Cements holds investments of Rs.23 crores in Equity Capital of Calcom Cements India Ltd.. RCL Cement is a profit making company and has reported Sales of Rs.40.80 crores, EBITA of Rs.12.50 crores and a PAT of over Rs. 7.0 crores for FY 06-07.
SCL Cement Pvt. Ltd. – Vinay Cement has also acquired shareholding of SCL Cement Pvt. Ltd. from the promoters of Vinay Cement Ltd. SCL Cement Ltd. is currently implementing a Greenfield project for a 2.31 lakh cement plant alongwith a capacity of 1.32 lakh ton of Calcined Clay in Assam at a total cost of Rs.36 crores, to be financed through a mix of Term Loan, Internal Accruals and Equity. The plant is expected to come up in stages with the first stage scheduled to be implemented in March 08 and subsequent stages in June 08 and December 08.

Calcom Cement India Ltd. – Calcom Cement India Ltd. currently has Vinay Cement and RCL Cement as its major shareholders. Calcom Cement is implementing a 14 lakh ton project in North Cachar Hills region of Asom at a total cost of Rs.415 crores. The project is the largest cement project in the region and is expected to be implemented by December 08. Calcom Cement is the largest Industrial Investment in the state till date and has Equity participation by IL&FS and Government of Assam.
With the ongoing projects, the group would emerge as the largest cement manufacturer in the region.

Open Offer

Pursuant to the acquisition of RCL Cements Ltd. and allotment of shares to the promoters of Vinay Cement, the promoters of Vinay Cement are coming out with an Open Offer for acquisition of 20% public shareholding at a price of Rs.35 per share, as per SEBI Guidelines. In view of the open offer, we believe the stock price of Vinay Cement is unlikely to appreciate significantly from the current levels in the short term; this would however provide the long term investor with an opportunity to accumulate the stock at the current levels and on declines.

Financials

The latest financials of the company are given as under :-
QUARTERLY - LATEST RESULTS - Vinay Cements Ltd (Curr: Rs in Cr.)
Particulars Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended Year Ended

(Jun 07) (Jun 06) (% Var) (Mar 07) (12) (Mar 06) (12) (%Var)
Sales 8.78 13.64 -35.6 48.9 40.24 21.5
Other Income 1.16 1.38 -15.9 10.28 6.37 61.4
PBIDT 1.31 2.34 -44 11.82 8.76 34.9
Interest 0.35 0.21 66.7 1.1 0.65 69.2
PBDT 0.96 2.13 -54.9 10.72 8.11 32.2
Depreciation 0.6 0.55 9.1 2.44 2.19 11.4
PBT 0.36 1.58 -77.2 8.28 5.92 39.9
Tax 0 0 - 0.28 0 -
Deferred Tax 0 0 - 0 0 -
PAT 0.36 1.58 -77.2 8 5.92 35.1
(Source: Capitaline)
Latest Data As On 14/09/2007
Latest Equity(Subscribed) 18.9
Latest Reserve 53.7
Latest Bookvalue -Unit Curr. 38.41
Latest EPS -Unit Curr. 3.59
Latest Market Price -Unit Curr. 37.65
Latest P/E Ratio 10.49
52 Week High -Unit Curr. 42
52 Week High-Date 8/3/2007
52 Week Low -Unit Curr. 15.6
52 Week Low-Date 9/15/2006
Market Capitalisation 71.16
Stock Exchange BSE
Dividend Yield -% 0
(Source: Capitaline)

Conclusion

The promoters of Vinay Cements have undertaken a consolidation exercise which will make all cement business of the group, a part of Vinay Cement. The consolidation will help Vinay Cements, consolidate its competitive edge in the cement map of the region through increase in market share and cost savings through common dealer network and sharing of other common costs. The consolidation of all cement business of the group into Vinay Cement would also remove any conflict of interest between the public listed company and the private companies of the group involved in similar business, thereby improving the perception of the company in the minds of investors and therefore better discounting. Some recent press reports suggest that group is also talking to small and medium sized players in the business for acquisition to ramp up business.

Vinay Cement itself is ramping up its capacity from 2.4 lakh tpa to 5.0 lakh tpa through debottlenecking and adding balancing equipment.

Vinay Cement enjoys several advantages :-

- The company has its plants located in area where currently over 50% of the cement demand is fulfilled from supplies from neighbouring states. Being a difficult terrain, the transport cost is substantial, which provide the cement manufacturers of the area a distinct advantage.

- The company has Limestone quarries which have been given by the state government on Long Term Lease. This arrangement takes care of any worries on the raw material front.

- As per North East Industrial and Investment Promotion Policy, 2007, notified in April 2007, the Centre has provided substantial financial incentives for setting up manufacturing operations in North-East – these include exemption from Sales Tax, Excise Duty, and Income Tax. The icing in the cake is that the state also provides Capital Investment subsidy of 30% – this effectively means that plants being set up will be entitled to a subsidy of 30% of the Capital Cost (cost of Plant & Machinery & Capital Equipment). This could lead to Corporate Houses looking at North East for setting up their manufacturing facilities, leading to increased Infrastructure Development in the Region. Also, these incentives would make the new cement plants being set up in the region to be more competitive than the ones located outside the state leading to enhancement of shareholders value.

The major RISKS in the investment include Execution Risk by the promoters, resurgence of problems like militancy and insurgency in the region and the possibility of other players setting up cement plants in the area leading to the demand-supply fulcrum shifting in favour of the latter, thereby reducing profitability.

The North East has seen little infrastructure development in the past due to various problems it faced including Insurgency and militancy – things however could change in the years to come. The region could witness substantially increased infrastructure spending in the years to come primarily on account of the local problems being brought significantly under control and various Hydel Projects, Irrigation, Housing and Road projects being undertaken. Moreover, the region could witness Industrial Activity on account of the fiscal incentives provided by the government for setting up industries in the region.

The North Eastern part of the country has been a cement deficit region and with demand far outstripping the supplies, the cement prices in the region are much higher than many other parts of the country. Currently, majority of the supply for cement in the region comes from outside the region – there is therefore a ready market for cement in the region.

The current consolidation exercise and with various projects under implementation, especially Calcom Cement, will see the group emerge as largest cement manufacturer in the region with a capacity of over 20 lakh ton by December 2008 and will see the Consolidated Revenues and profitability of Vinay Cement going up multifold in the years to come.

Vinay Cement is therefore a play on the demand explosion that the Cement deficit market of North East is expected to witness in the years to come. Investors can accumulate the stock at the current levels and on declines.