One stock that has got me thinking over the past fortnight is Saurashtra Cement. For months, it was given up for the near-dead, languishing around a market capitalisation of Rs 200 crore, before someone breathed life into it saying 'Go forth, seek your potential.' The stock jumped Rs 10 in a single trading session to Rs 59 and thereafter peaked at Rs 78 within a few trading sessions, 95 per cent appreciation in only six sessions.
Seems someone just woke up to the fact the Saurashtra Cement wasn't a loss-making company after all; it reported an Ebitda (earnings before interest, taxes, depreciation, and amortisation)of Rs 97 crore, an Ebitda margin of 15 per cent and a cash profit of Rs 69 crore in 2014-15. Best of all, the company was virtually debt-free (long-term debt), making it an attractive play. HDFC Securities sealed it by sending out a mail stating it quite liked the company's valuation at $30 a tonne, at a time when peak valuations are about seven times this level for other low-debt cement companies (though larger and premium).
The big questions: For a market that seldom misses even a fleeting opportunity in a bull market, how could it miss a sitter like Saurashtra Cement -a longstanding brand in a mature sector in a visible state (Gujarat)?
The reasons are possibly not hard to gather.Saurashtra Cement has an installed capacity of a mere 1.5 million tonnes per annum (mtpa) in a sector where the minimum calling card is possibly five mtpa. Most fund managers invest in scale; a company with only 1.5 mtpa (cascading into correspondingly low sales and market capitalisation) does not show up on most radars.
Saurashtra Cement has virtually gone into strategic rigor mortis; for a 57-year company to remain 1.5 mtpa for 10 years is a sign the management is probably not interested in growing this company.
That brings us to a deeper question. If the management is not keen to grow this company and not willing to sell it either, should it make sense for another management to make a hostile run for Saurashtra Cement, starting from a valuation as cheap as $30 a tonne, when competitors have been picking up cement assets right up to $140 a tonne?
With the management owning over 50 per cent of equity, this might be difficult.
So, if the company cannot be acquired hostile and is not keen on growing capacity but is content to repay debt and sit on cash at a time when the Indian economy is poised for robust growth and every second company is investing in capacity addition, shouldn't shareholders start an aandolan demanding reinvestment into production capacity that could kickstart revenues and valuations?
Just think. Saurashtra Cement was a 1-mtpa company when Gujarat Ambuja Cement, no more than 100 kms from the former's plant, was a 1.4 mtpa fledgling in 1985. In the past 10 years, Saurashtra Cement's production capacity has remained stagnant; Gujarat Ambuja Cement has grown capacity almost threefold to 28 million tonnes and merged into India's largest cement company.
Passion makes all the difference.
