Investors wary of Shree Cement’s plan to buy plant in the UAE
Shree Cement's shares on Friday fell Rs655.45, or 3.36%, to Rs18,856.50 on the BSE in a flat market, as analysts were worried about the management's ability to deal with local regulations
Kolkata: Investors and analysts are not impressed with Shree Cement Ltd’s plans to acquire a 4-million tonne cement plant in the United Arab Emirates for an enterprise value of $305 million, or Rs1,945 crore at current exchange rates.
A day after it announced the deal, Shree Cement’s shares on Friday fell Rs655.45, or 3.36%, to Rs18,856.50 on the BSE in a flat market, as analysts were worried about the management’s ability to deal with local regulations. Though the price to be paid by Shree Cement to acquire Union Cement Co. PSC—$76 per tonne—appears to have been “below replacement cost", Indian companies have not had much success venturing into West Asia, said Kotak Institutional Equities Research.
Citing the example of Star Cement, which was taken over by UltraTech Cement Ltd in 2010, Kotak’s research report said the Abu Dhabi-based Star Cement has not had any “significant growth" in the past three years.
Motilal Oswal Securities Ltd said in its report that though the acquisition is in line with Shree Cement’s strategy of adding production capacity at low cost, the management’s “execution capabilities" in a new market are “yet to be tested".
IDBI Capital Markets and Securities Ltd in its report said though it is being assumed the return on capital employed from the acquisition is going to be more than 10%, the UAE market “is prone to price regulations and higher fuel costs".
Subhash Jajoo, chief financial officer of Shree Cement, said Star Cement under Ultratech hasn’t done too well because the local economy in West Asia went into a downturn after 2010. It continued until recently, but now the economy in West Asia is showing signs of recovery, according to Jajoo.
Oil prices have firmed up over the past 7-8 months, and if the current level is sustained, the economy in West Asia is in for a boom, he said, adding that several broking firms see Shree Cement’s acquisition as a “positive development".
While announcing the acquisition on Thursday, Jajoo had said the price was attractive. Competitors had acquired units at much higher prices, paying even $110-120 per tonne. In addition, the Ras Al-Khaimah based Union Cement has access to a wide market in the Gulf region and in East Africa, its factory being located close to the Saqr port.
Besides producing 4 million tonnes of cement a year, the company produces 3.3 million tonnes of clinker, the key ingredient of cement. In 2016, Union Cement reported an operating profit of $33.7 million on a revenue of $153.4 million, which translates into an operating profit margin of 21.9%.
In India, Shree Cement produces 29.3 million tonnes a year, and is looking to scale up its production capacity to 40 million tonnes within two years. The company has a cash reserve of Rs4,000 crore, according to its chief financial officer.
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