Shree Cement plans to close Union Cement deal by July

Kolkata: Shree Cement Ltd, one of India’s top three cement makers, has budgeted for a capital expenditure of ₹ 3,500 crore in the current financial year, which includes ₹ 2,000 crore to be spent to conclude the acquisition of a United Arab Emirates-based (UAE) firm.

The Kolkata-based company is looking to close the acquisition of Union Cement Co. PSC by July, a few months ahead of plans, according to Subhash Jajoo, Shree Cement’s chief financial officer.

The Ras al-Khaimah-based company has concluded a buyback programme and is to be taken private.

The fully diluted cost of acquiring the overseas firm is expected to be around ₹ 2,000 crore. But that wouldn’t hobble Shree Cement’s plans to scale up production capacity within India: the company will spend at least ₹ 1,500 crore in the current financial year to acquire land and set up grinding units in Odisha, Jharkhand, Maharashtra and West Bengal, according to Jajoo.

An investment of ₹ 1,300-1,400 crore has been budgeted to set up the grinding units in these states, which will ramp up Shree Cement’s production capacity by 7-8 million tonnes (mt) from 34.9 mt currently.

These new facilities are expected to be commissioned in fiscal year 2020, said Jajoo.

In the current year, Shree Cement expects to commission its integrated cement plant in Gulbarga in Karnataka with a production capacity of 3 mt in October. The investment is ₹ 1,800-1,900 crore to set up the unit, of which it borrowed ₹ 1,600 crore. Shree Cement is currently indebted to the tune of ₹ 2,200 crore.

Emkay Global Financial Services Ltd had in a recent report said that Shree Cement’s efficiency in managing costs, lower capital cost for expansion and plans for scaling up operations without leveraging its balance sheet are reasons for its being ahead of competition.

The report also notes, however, that in the near term, the lack of pricing power remains a concern for the entire industry.

The management of Shree Cement, led by managing director H.M. Bangur, has historically avoided taking over existing capacity because it is of the view that it can set up plants ground up at a much lower cost.

But in January this year, it agreed to acquire the Ras al-Khaimah-based firm for an enterprise value of $305.24 million because it was available at a “competitive” valuation of $75 per tonne of output, according to Jajoo. Union Cement produces 3.3 mt of clinker and 4 mt of cement.

Under the local securities market laws of Abu Dhabi, Union Cement had to be taken private by buying back shares from minority shareholder, Jajoo said. Whereas at the time of concluding the agreement to buy the unit, the controlling stakeholder’s ownership was 92.83%, it has now gone up 95-96% because of the buyback, Jajoo said.

The company had some 800-900 minority shareholders, who were offered 2.1 UAE dirhams per share for cashing out. The buyback price was significantly higher than the highest trading price of 1.85 UAE dirhams in the 12 months prior to the buyback, Jajoo said.