 "Kumar Mangalam Birla")
In a quiet move on Monday, the finance committee of Century Textiles' board of directors allotted 8.47 million shares to the Birlas, thus increasing the promoters' stake by around 8 per cent in the company. The fact that Kumar Mangalam Birla, chairman of the Aditya Birla group, chose to raise his stake in Century Textiles within nine months of warrants being allotted has once again bought the focus on Birla's plans for the company.
Bankers say the Birlas (Kumar Mangalam and his grandfather, Basant Kumar Birla) currently own 40 per cent stake in the company. After the warrant conversion their stake will touch 50 per cent - giving them tighter control of the company. Though 94-year-old B K Birla is the chairman of Century Textiles, it is Kumar Mangalam who has chaired the board meetings of the company for the last few years, while the day-to-day management has been left to professionals, say insiders.
Bankers say among Birla's top to-do list for Century Textiles is to separate its cement division and merge it with the group's much bigger UltraTech Cement. The transaction between UltraTech and Century Textiles is likely to be an all-share deal: the shareholders of Century Textiles will get shares in UltraTech in lieu of the cement division. The 13 million tonnes per annum cement capacity of Century Textiles is valued at Rs 10,500 crore, or around $130 per tonne.
It's a win-win deal for Kumar Mangalam as he will get half of the shares in the swap with his 50 per cent stake in Century Textiles, say bankers. Another benefit will be UltraTech's capacity crossing 83 million tonnes, which will make it the biggest cement company in the country, ahead of its European rival, the Holcim-Lafarge combine (the two have announced a global merger of their operations), which has a capacity of 71 million tonnes. Birlas aim to take UltraTech's capacity to 100 million tonnes by 2020 and Century Textiles' will help it to meet the target.
One big advantage will be the price of Century Textiles cement. UltraTech products command a 25 to 30 per cent premium in the market compared to Century Textiles cement. By changing the brand to UltraTech, Century Textiles' products could get better prices, say analysts.
Bankers say if the deal is cleared by the boards, it will immediately give a boost to Century Textiles as it will receive good valuation for its cement division: almost double of its current market capitalisation of Rs 6,178 crore. The company's share price has already shot up 21 per cent since January this year over speculation that Kumar Mangalam will take charge of the company. Century is expected to retain its other businesses, including real estate, textiles, rayon and paper.
After the share-swap deal, the Birla family's stake might come down in UltraTech from 61.69 per cent to 60.31 per cent. Though both Century Textiles and UltraTech officials deny any merger plan is on the cards, bankers say Axis Capital has been mandated to work on the merger plan and come out with the share swap ratio.
Growth pangs
The restructuring of Kumar Mangalam's cement business comes at a time when the sector is witnessing muted growth and companies are expecting a pick up only in the second half of the current financial year. Analysts say after growing 10 per cent in the first half of 2014-15, the cement demand has weakened considerably since December, led mainly by weak rural demand. In the whole of 2014-15, demand growth averaged at around 7 per cent. Historically, the March quarter is the strongest for cement demand and prices, but demand in the recently concluded quarter remained muted, with prices showing weakness except in South India where the prices shot up due to a rise in freight costs, says an analyst with Goldman Sachs.
In this backdrop, analysts say both Century Textiles and UltraTech will have to look at opportunities to cut costs and make the best of the synergies between their cement businesses. UltraTech is already on an expansion drive and is spending Rs 10,000 crore to add 10 million tonnes of capacity.
It has also bought Jaypee's cement capacities in Madhya Pradesh and Gujarat. During the December quarter, the UltraTech board had approved acquisition of Jaypee's cement business in Madhya Pradesh, with a capacity of 4.9 million tonnes, at an estimated enterprise value of $135 a tonne.
Analysts say the cement sector has been reeling under continued underutilisation of capacities, which are at a decade low on a pan-India basis. The regional disparities are stark: while the southern plants are operating at around 60 per cent in spite of a price rise to Rs 400 a bag due to increased freight cost and inability of cement makers to run plants to full capacity, The north remains more comfortable at 75 per cent.
While the demand recovery due to restoration of political stability in Andhra Pradesh will be interesting to watch, price volatility is likely to remain. Besides a delayed revival of the economy and a sustained period of low consumption growth could put the expected earnings growth in the cement sector at risk. Cement capacities' low utilisation rates may result in continued price volatility.
In this scenario, it's important to have a strong balance sheet and the merger between UltraTech and Century will provide just that to the merged entity.
