Orient Cements Ltd., which on Thursday acquired two cement assets of Jaiprakash Associates Ltd. (JAL), expects to restart operations in the two units over the next four to six months.
The CK Birla group-owned firm acquired 74 percent stake in the Bhilai Jaypee Cement Ltd. of JAL at an enterprise of Rs 1,450 crore and the Nigrie cement grinding unit of anothet Jaypee Group company Jaiprakash Power Ventures Ltd. in Madhya Pradesh for Rs 500 crore.
BloombergQuint’s Ira Dugal and Soumeet Sarkar spoke to Orient Cement’s Managing Director and CEO Deepak Khetrapal. Here are the edited excerpts.
Were both the plants you have acquired not profit-making when they were with Jaypee?
Bhilai Jaypee Cement is not one unit but one company having two production units. And then there is the Nigri grinding unit that we are buying from Jaypee Power Ventures, which is the third unit. All these three units have been shut for quite a while. They have not been operational for many months due to challenges faced by Jaiprakash Associates.
What will it take for you to restart the closed units in terms of initial investments?
The only thing it needs is for the acquisition process to be completed with regulatory approvals which, in my view, will take 4-6 months. The moment the approval is through and the deal is completed, we will be able to start the plant in 7 to 10 days.
How much additional capacity will you get once the two units are restarted?
The new clinker-based capacity is 2.2 million tonnes which comes to us. Then there is the 2 million tonne grinding capacity for which we aren’t getting any additional clinker capacity. So there is 10.2 million tonnes of integrated capacity and another 2 million tonnes of grinding capacity which currently is short for clinker. We do have clinker capacity in Gulbarga and in Telangana. The plants there have some capacity which is not utilised. So we will try running the clinker there to capacity and transport part of the clinker to Bhilai to meet the gap between the kinds of clinker we are buying. So these are the synergies that are key to the transaction.
How does this fit into your strategy of increasing market share? What are you now aiming for going ahead?
This is a dream acquisition. Currently, we are present in Maharashtra, Andhra Pradesh, Telengana and Karnataka while we have no presence in areas like Chattisgarh, Madhya Pradesh, Bihar and Uttar Pradesh. Those are the markets that we can address using these facilities. So, there is no overlap and at the same time there are enough synergies to move clinker from our existing plant in Telengana to Bhilai.
How much is the total debt on the books of Jaypee’s Bhilai cement plant? As of March 31, it did not have any long-term debt.
The total debt on the books is over Rs 600 crore. Obviously, this is not long term debt since a lot of funding has come from the sister company. It is the total debt that I am talking about. We will be refinancing the total debt. Obviously Jaypee’s loans to Bhilai Jaypee Cement Ltd. (BJCL) will not continue once we buy it. For that we are in touch with the financers and we will refinance them.
Valuation wise, the company had total asset of about Rs 800 crore. How did you arrive at an enterprise of Rs 1,450 crore?
The enterprise of Rs 1,450 crore has been arrived at based on the cement capacity we are buying. The book of assets has no relevance when anybody goes to buy assets. People ask about the opportunity and the replacement cost? These are complete plants. We are buying this BJCL asset of 2.2 million tonnes capacity at Rs 1,450 crore which gives us a valuation of nearly 98 dollars. From whatever I know of the transaction, this would be one of the best prices you would have seen for a cement capacity transfer. The internal grinding unit comes at 38 dollars per tonne, which is much lower than the prevailing market rate. This grinding unit is at the premises of a power plant, so there is no transportation cost for flier at all. Actually it should command a premium over the Panipat unit that was brought by Shree Cement which has no fliers in its premises. I think in terms of valuation, we are getting a very favourable valuation for Orient Cement shareholders. Strategically, it works brilliantly.
How are you planning to fund this acquisition?
We still are working out the numbers with our financial advisors. Our intent is to keep the debt-to-equity ratio between 1.5-1.6, not more than that. For that perhaps we will have to bring in equity ranging from Rs 500-700 crore. The exact quantum will be known in the next week to ten days.
We have seen a fair number of deals go through in the cement sector. Has this consolidation led to an improvement in pricing power in the hands of the cement companies or that hasn’t really changed?
To be honest, the deals you have heard about are still awaiting approvals. Only after the approvals come through, the new owners take charge of the asset and then you can talk about consolidation and pricing. When such deals are announced, there is a timeline to get a series of approvals. Consolidation can happen only when assets change hands. Announcement of deals doesn’t consolidate anything.
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