Not a bagful really

IPO REVIEW

Binani Cement's public offer isn't any stand out for investors to grab.

Well, to state that cement stocks aren't having the best of times wouldn't really be something out of the box. And in such uncertain times, when cement stocks are bleeding, the Rs 154-174 crore public offer of Binani Cement would seem strange.

But to cut the mystery short, JP Morgan Special Situations (Mauritius) a subsidiary of JP Morgan Chase and Co has planned to offload 10 per cent stake (out of 25 per cent it holds) in the company to the public.

Ask Suresh Prabhala, vice president, JP Morgan Asia Special Situations Principal Investments on why his group wants to reduce its exposure and pat comes the reply, "Well, we believe that for the future growth of the company, liquidity is very important," adding," but we still have 15 per cent holding and that's a point to remember."

Whatever be the case, it is rendered obvious that investors should measure their investments on the company rather than any specific objects of issue.

The good things first. The company has a strong presence in key northern states like Rajasthan (where it has a 13 per cent market share) and also in Gujarat, Haryana and Delhi. The northern region has witnessed buoyant demand growth of 7.5 per cent CAGR in the past five years and is expected to grow at an average annual rate of nine per cent in the next three years.

The company has reaped the benefits of the rising price situation in the past one year as testified by its operating profit margins expanding by 650 basis points to 34.2 per cent in FY07. The topline has grown about 39.2 per cent in the same period.

The company has also shown an ability to time its investments in a proper manner. It has already finished ramping up its capacity by a massive 2.3 million tonnes per annum to 5.3 million tonnes per annum.

The new capacity will commence production anytime now. Given the limited upside for prices this year, volumes would play a key role in growth. And this is where the timely capacity addition comes to the rescue.

On the flipside, the company's debt-equity ratio at about 2:1 is a cause for concern though D Sundarajan, executive director, Binani Cement explains, "We should bring down the debt-equity levels to around 1.2:1 in FY08."

The favourable demand-supply situation in the north is also, according to some analysts, expected to last shorter than other regions. While the capacity addition in the north is to the order of 50 per cent of the present capacity, the northern region is expected to carry the highest level of downside risk by 2009.

In fact, a significant proportion of the capacity could kick in in FY08, which could see incremental supply of cement reaching an estimated 10 million tonnes compared to an estimated incremental demand of 2.6 million tonnes in FY09.

For the first three quarters of FY07, Binani recorded a net profit of Rs 70 crore on sales on Rs 493 crore.

Overall, Binani's nine month operating margins of 33 per cent are higher than those of peers such as JK Lakshmi (29.5 per cent), Mangalam (28.1 per cent) but lower than Shree Cement (44 per cent). Its valuations, too, aren't attractive compared to peers.

For example, assuming an 80 per cent increase in its net profits, we arrive at a P/E of 8.7-9.9 times estimated FY08 earnings. This remains slightly higher than peer valuations viz Shree Cement (7.9 times), JK cement (6.4 times), JK Lakshmi Cement (5.3 times).

"At such times when tremendous uncertainty surrounds cement stocks in general and also given the expected demand-supply scenario in the northern region, Binani Cement dosen't really stand out as an attractive stock in terms of valuations," says an analyst from a domestic broking firm.

Issue open: May 7, 2007
Issue close: May 10, 2007