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Dalmia Bharat Group Seeks To Unlock Value By Consolidating Cement Businesses Under One Unit

Will Dalmia Bharat restructuring give the group market valuation commensurate with market share?



Workers unload sacks of cement from a freight train in Mumbai, India (Photographer: Kuni Takahashi/Bloomberg)
Workers unload sacks of cement from a freight train in Mumbai, India (Photographer: Kuni Takahashi/Bloomberg)

Dalmia Bharat Group undertook its third restructuring in a year to simplify its group structure. Once the current round of restructuring, which is through a scheme of arrangement is complete, the group will consolidate all its cement businesses under one listed entity, Odisha Cement Ltd. ODCL will be renamed as Dalmia Bharat Ltd. once the restructuring is complete. The listed entity will have a cement capacity of 25 million tonnes spread across eastern and southern India. Equity share capital of the merged entity would stand at 19.2 crore equity shares with the face value of Rs 2 each, taking the total equity capital worth Rs 38.4 crore.

Currently, the group operates its cement businesses through subsidiaries held through two listed companies - Dalmia Bharat Ltd. and OCL India Ltd. Dalmia Bharat holds 100 percent in cement operating company, Dalmia Cement (Bharat) Ltd., which in turns owns 75 percent in OCL India Ltd.

The Transaction

Dalmia Bharat group will consolidate its cement business in two steps, as per the statement released to the stock exchanges on November 6.

  • Issue two shares of ODCL for every one share held in Dalmia Bharat Ltd.
  • Further, DCBL, the step down 100 percent subsidiary of Dalmia Bharat Ltd. will issue shares worth Rs 7,200 crore to ODCL.

As per the restructuring exercise, the equity value of ODCL, which has 9.3 million tonne cement capacity, is pegged at Rs 7,200 crore, much higher than the current equity value ODCL (OCL India). The current market capitalization of OCL India stands at Rs 5,360 crore.

The Share Price Movement

The share price of OCL India has doubled in the current financial year from Rs 486.85 on April 1, 2016, to Rs 942 on Nov 4, 2016. The current market capitalisation of OCL India is at Rs 5,360 crore. Dalmia Bharat has risen from Rs 792 per share to Rs 1,980 per share during the same period, giving the company a market capitalisation of Rs 17,582 crore.

Peer Comparison

Even though it is the fourth largest cement player in the country with 25 million tonne capacity, the market is yet to give it a market capitalisation commensurate with the market share it holds in the key eastern and southern regions.

Market Cap

  • Ultratech: Rs 1,06,074.98 crore
  • Ambuja: Rs 47,824.27 crore
  • ACC: Rs 27,907.07 crore
  • Shree Cement: Rs 58,522.71 crore
  • Dalmia Bharat: Rs 17,582 crore
  • OCL India: Rs 5,360 crore

Shareholding Post Merger

Post the scheme of amalgamation, promoters will hold 53.17 percent stake, while the public will hold 43.55 percent stake. Non-promoter non-public shareholder, which is the employee benefit trust, will hold 3.28 percent in the merged entity as against 3.55 percent in Dalmia Bharat.

Odisha Cement

Restructuring for the creation of OCL India is currently pending court approval. In March 2016, Dalmia Bharat group undertook restructuring to consolidate its eastern India cement businesses with 9.3 million tonne capacity into Odisha Cement. This was done through a scheme of arrangement between OCL Ltd., the listed entity, Dalmia Cement East Ltd. and promoter entities allied to the cement businesses. The scheme of arrangement is pending approval from the various High Courts. Upon approval, the company proposed to rename ODCL as OCL India Ltd. and list on the BSE and NSE. This process is expected to be completed in the next six months.

ODCL will have to issue one share of the company of Rs 10 face value for every one of Rs 2 face value held by the shareholder of OCL India, according to the scheme of arrangement and documents disclosed on the company’s website. This transaction gives ODCL (post scheme of amalgamation) an equity value of Rs 5,640 crore.

Growth And Market Share

The group has boosted its cement capacity at a compounded annual growth rate of 35 percent since the financial year 2005-06. From 1.2 million tonnes in 2006, the company’s capacity has risen to 25 million tonnes by March 2016. 52 percent of its capacity is in eastern India, while 42 percent is in southern India.

It has a 12.9 million tonne capacity in eastern India, thereby making it the largest player in that region with 14 percent market share. The company has 12.1 million tonne capacity and 7 percent market share, making it one of the top five firms in the market. Since 2012, the company made four acquisitions, all in the eastern market.

Financials

The company ended the financial year 2015-16 with a consolidated net revenue of Rs 6,433 crore. The earnings before interest, tax, depreciation and amortization (EBITDA) stood at Rs 1,579 crore. The EBITDA margin of 25 percent, was the highest in the industry.

Axis Capital provided fairness opinion on the swap ratio from DBL shareholders’ perspective.