Nuvoco Vistas - IPO Research Note

Nuvoco Vistas, the cement company promoted by Karsanbhai Patel of Nirma fame, has a pedigree of 22 years in the cement business. It began by acquiring the cement businesses of Tata Steel, L&T and Raymond and recently added cement plants of Lafarge India and Emami to emerge as the fifth largest cement company in India. With an installed capacity of 22.32 MTPA, Nuvoco ranks after Ultratech, Lafarge Holcim, Shree Cements and Dalmia Cements in terms of installed cement capacity. 

However, Nuvoco is the largest cement company in the East and has 17% of the total capacity in the East and 5% capacity in the North. It ranks among the top-4 ready mix concrete manufacturers in India. Its 11 cement plants are distributed, 8 in the East and 3 in the North while it has 49 RMX plants across India. Nuvoco has seen its installed capacity double in the last 5 years. 

Nuvoco Vistas IPO Details

_{Data Source: IPO Filings}

Some of the advantages in the business model of Nuvoco Vistas are as under.
•    It is the largest cement producer in the fast-growing East India market
•    Most cement plants are located in close proximity to key markets
•    Wide distribution network of over 16,000 dealers pan India
•    Excluding the COVID months, Nuvoco had capacity utilization of above 90%
•    Its cement enjoys EBITDA/tonne of Rs.966 with a net debt/EBITDA ratio of 4.50

A quick look at the financials of Nuvoco Vistas

Over the last 3 years, Nuvoco Vistas has shown steady revenues while the EBITDA is up more than 50% over last 2 years, improving EBITDA margins by 619 bps. 
 

Data Source: Company RHP

We have considered ROCE instead of ROE as Nuvoco Vistas has made losses in FY21 and FY19. Revenues have been more or less static over the last 3 years, but the impact of increased capacities should show up in the post-COVID scenario. Also, the book value at over Rs.230 acts as a buffer for the value of the stock.

Out of the Rs.1,500 crore raised by way of fresh issue, Rs,1,350 crore will be used for pre-payment of loans and other borrowings. With net debt at Rs.6,730 crore, this debt repayment will help the company reduce leverage and also improve the net debt/EBITDA ratio and ROCE.

Investment Perspective for Nuvoco Vistas

While the company made profits in FY20, it has made small net losses in FY21 and FY19. However, if you look at Nuvoco Vistas as a macro play on cement demand, especially in East India, then the story looks a lot more compelling.

a)    The overall capacity utilization of 77.6% for cement and 83.3% for clinker is almost back to pre-COVID levels. This should facilitate better absorption of fixed costs and higher profits going ahead.

b)    Apart from being best positioned to serve markets in the East and the North, Nuvoco plants in Chhattisgarh and Rajasthan allows the company to easily serve the markets of Uttar Pradesh, Madhya Pradesh and Maharashtra.

c)    The company is gradually moving from cement manufacturing to building solutions. This is evident from their diverse product mix consisting of chemicals, adhesives, wall putty, dry plaster, cover blocks and dry concrete. This also de-risks their portfolio.

d)    Since 1999, when it took over the cement operations of Tata Steel, Nuvoco has a track record of completing and integrating cement acquisitions seamlessly into its model. That is key to future inorganic growth plans.

e)    The ready-mix-concrete business contributes Rs.1,088 crore to the top line which puts Nuvoco in the same league as leaders like Ultratech, ACC and India Cements. 

The issue price values Nuvoco at 50X FY20 earnings. That places the valuation even higher than Shree and Ultratech, the two leaders in India. However, that may not be very representative since the model of Nuvoco is still work-in-progress. Also, the gains of premium products will be evident in the coming years. Investors can look at Nuvoco IPO for its East India domination and as a macro play in infrastructure in India.