Private equity firm Kohlberg Kravis Roberts’ (KKR) move to invest up to Rs750 crore in the cement business of Dalmia Cement (Bharat) Ltd (DCBL) will de-leverage the balance sheet, even as the group consolidates cement operations under one entity.
KKR will invest in DCBL’s wholly-owned subsidiary Avnija Properties, to fund its 10 million tonnes per annum cement expansion. Of the estimated project cost of Rs4,250 crore, DCBL has tied up debt of Rs3,250 crore. KKR’s investment will de-leverage the balance sheet through the 15-20% equity dilution.
In the December quarter, DCBL had net debt outstanding of Rs1,547 crore. Of this, company executives state that around Rs1,060 crore is associated with the cement business. After the restructuring and capital infusion, analysts expect the debt to equity ratio to come down from 1:8 to around 1:1. Meanwhile, the promoters, too, will invest Rs250 crore through the equity route.
A few months ago DCBL had decided to spin off its cement and sugar business into separate entities. Post-restructuring, while DCBL will have the sugar business, a new entity Dalmia Bharat Enterprises Ltd (DEBL), through Avnija, will house all the cement activities. It will also have the refractory and power business. Every shareholder of DCBL, will be given one share of DEBL, which the management plans to list subsequently.
According to analysts, the KKR deal is fairly valued given that it works out to an enterprise value (EV) of $100 (Rs4,500) per tonne. A new plant EV would be around $110-120 per tonne, while smaller companies are trading at an EV of $80 per tonne. Besides, DCBL’s existing capacity is mainly in Tamil Nadu and Andhra Pradesh, with relatively low utilization rate of around 50%. These low rates have led analysts to question the need for expansion. In a conference call, the DCBL management said that expansions are planned on a pan-India basis and will be staggered to match demand growth.
So far, the southern exposure has hit realizations. For the nine months ended December, DCBL’s stand-alone net sales were Rs1,629 crore, 28% higher than the year-ago period. But the sugar business, which was at the peak of the cycle and registered a 100% jump in revenue, was the major contributor.
Cement prices have improved by Rs15-25/bag from January onwards. But the outlook for the southern market remains bleak for the next 12-18 months, with supply exceeding demand.
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