If investors need any indication of an initial public offering (IPO) frenzy, just take a look at the last two weeks where two loss-making companies launched IPOs. Following Devyani International’s stellar subscription numbers, Nuvoco Vistas Corporation (Nuvoco Vistas) is set to launch its mammoth Rs 5,000 crore IPO. 

The east India focused cement company has had various owners, from being passed on from Lafarge Group to now the Nirma Group. But beyond the ownership changes, the company made a net loss in two of the last three fiscal years. Is Nirma Group’s cements business worth investors’ attention?

Entire fresh issue will be used to pay off debt

Nuvoco Vistas is a family-owned business headed by Dr. Karsanbhai Patel and Niyogi Enterprise, a company controlled by Patel, as the promoters. Members of Patel’s family from the promoter group of the company. 

The cement maker’s IPO issue size is Rs 5,000 crore and is divided into a fresh issue of up to 2.6 crore shares worth up to Rs 1,500 crore, and an offer for sale of 6.2 crore shares worth up to Rs 3,500 crore. Together, the promoter and the promoter group hold 95% of the company before the IPO. Post the IPO, the promoters and the promoter group’s stake will drop to 70.6%.

From the Rs 1,500 crore proceeds of the fresh issue, the company will use 90% (Rs 1,350 crore) to pay off debt. In FY21, the company’s debt was Rs 7,642 crore, a 71% increase against the previous year.

The IPO price band is Rs 560-570 per share. Post the issue, at the upper end of the price band, Nuvoco Vistas will be valued at nearly Rs 20,300 crore, making it the eighth largest cement maker by market capitalization.

The only institutional investor in the company today is Kotak Securities through its special situations fund, holding a 4.8% stake. In July 2020, Nuvoco Vistas entered into a debt subscription agreement with Kotak Securities where the company borrowed Rs 500 crore via compulsory convertible debentures (CCDs). On July 24, 2021, Kotak Securities converted these CCDs to 1.5 crore equity shares.

Nuvoco Vistas is valued at 2.7 times its FY21 revenue, and made a net loss in two of the past three years. However, its valuation remains cheaper than its listed cement peers.

Fifth largest cement company, largest in east India

Nuvoco Vistas has had many names in the past. It was originally incorporated as Infra Cements India in 1999. In the same year, Lafarge Group, the French construction company part of the Holcim Group which collectively owns Ambuja Cements and ACC, acquired 5.8 crore shares. Housing Development Finance Corporation (HDFC) also acquired 2 crore shares. Following this acquisition, the company changed its name to Lafarge Cements.

In 2016, Nirchem Cement, a wholly-owned subsidiary of the Nirma Group, purchased the Lafarge Group’s stake in the company and renamed it Nuvoco Vistas Corporation. Since then, the company has made three major acquisitions. In 2018, it acquired Eco Cements’ Bihar grinding unit, with a capacity of 0.6 million metric tonnes per annum (MMTPA). In February 2020, Nirma Group merged its Nimbol Cement plant in Rajasthan with the company which gave it access to the north Indian markets. In July 2020, Nuvoco Vistas acquired Emami Cement (later renamed NU Vista Cement) from the Emami Group for Rs 5,500 crore. Nuvoco Vistas’ management said in July 2020, following the purchase, that it may list Emami Cement as a separate entity in the next 2-3 years.

Nuvoco Vistas makes different types of cement under the Concerto, Duraguard, Nirmax, and Double Bull brand names. It also produces ready mix concrete like self-compacting concrete, decorative concrete, etc., and construction materials like tile adhesives, wall putty, dry plaster, cover blocks. The company did not provide a revenue breakup between these products.

Nuvoco Vistas is primarily an East and North India-focused cement company. It is the fifth-largest cement company in India and the largest in east India by installed capacity. The company does not export any of its products.

The company has 11 cement plants, eight in the east and three in the north, with a total capacity of 22.32 million metric tonnes per annum (MMTPA). In FY20, the average production capacity was over 90%, but due to Covid-19, it dropped to 77.5% for FY21. Nuvoco Vistas is planning to increase capacity by 2.7 MMTPA or 12% between FY 22-23. 

Revenue rises in FY21, but high cost plunges company into losses

Nuvoco Vistas’ revenues grew by 10% to Rs 7,489 crore due to a 9% increase in cement sales following the acquisition of Emami Cements. The company posted a net loss of Rs 26 crore in FY21 against a net profit of Rs 240 crore in the previous year. Losses were due to a 37% increase in interest expenses and a 12% increase in freight expenses as diesel and petrol prices rose 30% in the year. 

Nuvoco Vistas’ power expenses rose by 9% in the year due to rising coal and pet coke prices. In FY21, the company increased its coal usage by 85% to 0.89 million tonnes (MT) and decreased its petroleum coke (petcoke) usage by 12% to 0.36 MT.

To make up for the rising costs of power and freight fuels, the cement industry hiked prices by 15% in FY21. This helped Nuvoco Vistas’ EBITDA margins grow by 40 basis points YoY in FY21 to 20%. That said, Nuvoco Vistas’ margins are lower than its peers.

Nuvoco Vistas’ recorded a net loss of Rs 26 crore in FY21, hence its return-on-equity (ROE) was negative. In FY20, when it recorded a profit of Rs 240 crore, the ROE was 5%.

Debt surges in FY21, cash flows remain stable

The company’s debt levels are rising but its debt-to-equity ratio remains low. In FY21, the total debt was Rs 7,642 crore, a 71% rise against the previous year as the company spent Rs 623 crore to set up a grinding unit and a power plant. 

The company’s interest expenses rose by 37% in FY21 to Rs 664 crore, however, its interest coverage ratio (the interest coverage ratio is the company’s EBITDA to interest expenses, and indicates the operating profit available to cover interest costs) remains stable at 2.25. As of FY21, the company’s debt-to-equity ratio was 1.04 against 0.85 in the previous year. In Q1FY22, the company paid off debt worth Rs 60 crore. 

Nuvoco Vistas’ operating cash flows in FY21 were Rs 1,714 crore, a 67.5% increase YoY. Capital expenditure (capex) during the year was lower by 3% at Rs 550 crore. The company’s free cash flows in FY21 rose by 2.5X to Rs 1,165 crore. The company outlined a capex of Rs 527 crore (4% decrease YoY) in FY22 towards increasing the efficiency of its Uttar Pradesh, Punjab, and Rajasthan cement plants.

Capacity additions through acquisitions

India’s cement industry was hit hard by both waves of Covid-19 at either end of FY21. This led to a 2% decrease in cement demand at the start of FY22. The demand outlook would’ve been worse if the government had not announced its Rs 2.3 lakh crore infrastructure and housing plan. The second wave led to a near 40% decline in production in Q1FY22 but is expected to return to pre-Covid levels in Q2FY22. Crisil Ratings expects the demand for cement to grow at a compounded annual growth rate (CAGR) of 6-7% between FY 21-26, higher than the CAGR growth of 4-5% between FY15-20.

In order to cater to this increase in cement demand, companies are acting fast by increasing production capacity. Nuvoco Vistas doubled its cement capacity to 22.3 MMTA in FY21 from 11 MMTA in FY16. This is the highest growth in capacity among Indian cement companies in this period. Further, Nuvoco Vistas and Birla Corporation are the only two companies to record utilisation levels of above 90% against an industry average of 65% during pre-Covid levels. 

Investors should note this increase in Nuvoco Vistas’ capacity came from acquisitions of the past two years. With the acquisition of Emami Cements and Eco Cement’s grinding units, Nuvoco Vistas increased its capacity by nearly 40%. This came at the cost of racking up debt worth Rs 7,582 crore as of June 2021. 

However, the company’s debt-to-equity ratio remains stable at 1.04 and the company will reduce debt by 20% through the proceeds of the IPO. But with losses in FY21, and competitors like the Aditya Birla Group’s UltraTech Cement, Lafarge Holcim Group’s ACC, and Ambuja Cements, Nuvoco Vistas has little to offer.