Evaluation of Nuvoco Vistas IPO

Have you also witnessed lengthy debates amongst your family members while they were finalizing which cement should be used to construct your new house and wondered whether it actually makes any difference or not? If yes, you might as well get your answer while going through this blog.

This monsoon there is too much on the plate of SEBI, and with Nuvoco Vistas Corporation Ltd, it marks the 31st IPO of the year for the Indian stock markets.

Cement Industry Analysis

India is the second-largest cement manufacturing nation in the world, next only to China. Cement production has reached new heights over the past few years in India. Cement production reached 329 million tonnes (MT) in FY20 and is projected to reach 381 MT by FY22.

For cement manufacturing, the primary raw material needed is limestone, and as India possesses high & standard quality of limestone deposits, the industry looks quite promising in terms of growth prospects.

Nuvoco Vistas Corporation Ltd - Company Info

Established in 1999, Nuvoco Vistas Corporation Ltd is a manufacturing company that mass produces cement, Ready-Mix Concrete (RMX), and Modern Building Materials (MBM), which are the variants of the products that it has in its portfolio to offer.

It is the fifth-largest player in India, having its major dominance over East India, thus being the largest cement company in East India. Over the past, it has covered the majority of the East Indian market, and that became possible because the majority of its cement plants are located in the states of West Bengal, Bihar, Odisha, Chhattisgarh, and Jharkhand. Other plants covering miscellaneous terrain, being in Rajasthan and Haryana, all plants sum up to an aggregated installed capacity of 22.32 MMTPA (Million Metric Tonne Per Annum).

Nuvoco Vistas is a part of the famous Nirma Group, and we are sure that most of you would relate to this group as soon as we throw in a tagline of one of its cash cow products –  “Sabki Pasand Nirma, Washing Powder Nirma”.

While the pre-issue promoter holding was 91.24%, post-issue, it could be around 71%.

Market Size and Peer Comparison

Despite being the second-largest manufacturing nation, compared to the other major cement-producing countries, India exhibits the lowest per capita cement consumption at 200 to 250 kg, which is less than half of the world average.

These are the players in the industry -

The top 5 players have been gaining market share over the last five years through various acquisitions. UltraTech Cement has achieved its dominance by acquiring Jaypee’s assets and Century Textiles. On similar lines, the acquisition of Emami Cements by Nuvoco Vistas Corp Limited has led to it becoming the leading player in the eastern region.

You can see the market positioning of the players based on their market share below: 

The entire cement industry is an oligopoly market where price discovery happens in a cartel; hence, cement companies usually operate in a close price bracket. Their ability to compete effectively is dependent on the products being priced competitively while offering unique features that meet the customers’ requirements and budget; hence Nuvoco has no say on the pricing of its product, and for that reason, the last arrow in the quiver for Nuvoco is to enhance its operational efficiency, reduce its cost of productions; thereby enhancing its profits. So, now you know.

Details of the IPO

Objectives behind the Issue

1. To repay/prepay/redeem borrowings availed by the firm fully or partially.

2. General corporate purposes.

Now that we have had a fair idea of the business segment of Nuvoco Vistas Corporation Ltd, the industry, the market size, and the IPO details, let's jump into the decision-making part!

Why should you invest in Nuvoco IPO?

1. It has a well-diversified portfolio across Cement, RMX, and Modern Building material with 50+ product variants. They instill upon product innovation to be the evolving aspect of their brand because, as stated above, price is beyond their say.

2. Modern Building is the differentiating element for Nuvoco Vistas Corporation Ltd. The product range under the Zero M and InstaMix brands comprises construction chemicals, multipurpose bonding and waterproofing agents, Wall Putty, Tile Adhesive, Ready Mix Dry Plaster, and Cover Blocks.

3. Strategically located cement production facilities that are in close proximity to raw material and critical elements that are specially chosen to tap the Northern border of the country where the entity wishes to expand its market share in coming years.

4. The cement industry has high growth prospects given the Indian subcontinent demographics.

5. Nuvoco’s products are distributed through the trade segment, which mainly caters to individual home buyers, and the non-trade segment, which is primarily via direct sales to institutional and bulk buyers. As of March 31, 2021, they have 244 CFAs (agents), of which 162 are in East India & 82 in North India. Also, it has 16,076 dealers in India (10,091 in East India and 5,985 in North India) working day in day out to expand the sales horizon to new heights.

Why should you not invest in Nuvoco IPO?

1. The market space is fiercely populated with popular brand names like Ultra Tech and Shree Cement that dominate the space.

2. Limestone, being the primary raw material for cement production, creates a high dependency on it. To capture mining spots better than its peers and to obtain leases from state governments comes with its own set of challenges.

3. Limestone and coal, power, and fuel add to the bucketlist of the resources required for effective and efficient production of cement, and all these resources are subject to price volatility that might create a hindrance in its aim to be highly cost-efficient. The picture below depicts the cost breakup of the materials consumed:

4. Cement manufacturing, being an asset heavy business model, is usually associated with high Debt to Equity ratio. Still, in this aspect, Nuvoco Vistas’ debts weigh higher than its peers, which seems to be a significant limitation. The picture throws some major perspective on it:

5. Negative EPS, negative ROE, and RONW with a high debt to equity ratio are major concerns that deteriorate the fundamentals. Some industry mates feel that it's a risky bet to take.  

Conclusion

The cement industry is highly dependent on various other spheres of the economy. They perform or out-perform with hands in one another’s arms. The industry has high growth prospects in the light of government initiatives and spendings across the infra and real estate sector, but given the competitive landscape, there might be better alternatives available for a rational investor on a long-term basis.

Still, we don't want you to have a FOMO (Fear Of Missing Out), so do your thorough analysis and decide whether this IPO is your cup of cake or not.

Invest wisely!