IPO frenzy to rub on Nuvoco, but high regional exposure a key risk
PremiumDue to concerns of over-capacity in Eastern India, volumes and price realizations need to be monitored
The primary market is buzzing with excitement, and the ₹5,000 crore initial public offering (IPO) of Nuvoco Vistas Corp. Ltd could benefit from it. After all, it is after nearly 14 years that a cement stock would be making its debut on the Indian exchanges. Analysts say there has been a re-rating of cement stocks of late and this might contribute to the Nuvoco IPO’s success.
Importantly, the management has toned down expectations on the valuations front, which is expected to help generate demand for the IPO. The tapered-down market-cap expectation of around ₹20,400 crore implies an EV/Ebitda valuation multiple of 18-19 times for FY21 and 9.5-11.5 times for FY22-FY23, said analysts at Antique Stock Broking Ltd. They say this appears fairly priced, given the exuberance in peers with larger cement stocks trading at multiple of 10.5-18.5times for FY23 on an EV/Ebitda basis. EV is short for enterprise value. Ebitda stands for earnings before interest, tax, depreciation and amortization.
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Media reports state that when Nuvoco’s draft red herring prospectus was launched in May, the company was expecting a market-cap of ₹35,000-40,000 crore. “This is not a tech IPO; there is no product differentiation for commodity makers like cement. The kind of valuations that they were seeking earlier was at par or even higher than some pan-India cement giants," said an analyst with a domestic brokerage house requesting anonymity. “The current price band of ₹560-570 per share and valuations seem fair now and should boost investors’ demand for this issue. Listing gains should be around 10-15%, but the IPO boom could take it even higher," he added.
On the flip side, Nuvoco’s high regional concentration is a key risk, which investors should not overlook. The company derives more than 70% of its total volumes from the East and has some exposure to the North. Eastern India has seen significant capacity addition in recent years with key cement makers expanding their footprint in this market. Since there is already a situation of over-capacity, volumes and price realizations need to be monitored.
“Historical trends suggest that prices in the East tend to crack faster than other regions in lean periods, which means Nuvoco’s cash flows could come under pressure, which can be a concern given its debt," said another analyst requesting anonymity. Nucovo’s net debt nearly doubled in FY21 from its year-ago levels to ₹6,730 crore after the acquisition of Emami India in 2020. In 2014, it bought the cement assets of Lafarge India. With these, Nuvoco is now the fifth largest cement maker by capacity. The firm plans to use ₹1,350 crore out of the fresh issue of ₹1,500 crore to pare debt.
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