Search the Internet          Tips  Sites: Finance, Investment

India Cements to sell stake in group firm

India Cements Ltd, a major cement maker in the south of the country, plans to sell part of its stake in a group company to reduce its debt burden, an industry source said on Wednesday.

The Madras-based company, whose debt last year was more than twice its shareholder funds, is in talks with global giants like Italcementi, to sell some of its stake in Sri Vishnu Cement, the source said.

Sri Vishnu Cement, which is in the process of being delisted from the Bombay Stock Exchange, is 95 per cent owned by India Cements and has a manufacturing capacity of 1.25 million tonnes in the southern Indian state of Andhra Pradesh.

Both India Cements and Italcementi declined to comment on the issue.

"It is not the group policy to comment on such matters," Marc Desgranges, senior vice president, strategy and international development of Italcementi group told Reuters from Paris.

But a senior India Cements official told Reuters that all options were being explored. "We can't say a deal is done, till it is actually through and we have got the money," he said.

India Cements' move highlights the growing consolidation in the Indian cement industry, the world's second-largest producer, as cash-strapped companies seek alliances or sell out completely to survive.

Slowing demand, poor prices and competition from foreign players like Lafarge SA have affected earnings of many companies. The apex industry body, the Cement Manufacturers Association, reckoned early this year that 30 companies had filed for bankruptcy.

Two leading companies, Tata Iron and Steel Company and Raymond Ltd, have already exited the business.

Larsen & Toubro, a leading construction and engineering conglomerate, is planning to spin off its cement division into a separate company. Larsen is also in talks with foreign companies to sell a stake in the new company.

CUT INTEREST COSTS

If successful, a deal to sell a part or all of its current stake will help India Cements cut interest costs and achieve a better debt equity ratio. At the end of March 2001, India Cements had total debts of Rs18 billion, giving it a debt-equity ratio of over two times.

Its interest cover, the ratio of operating profit to interest outgo, for the same period was 1.34 times. This means more than half the operating profit of Rs 3.24 billion was used to pay interest in the last financial year.

The company's share price performance reflects the negative impact of this burden. Its shares have underperformed the main Bombay index so far in 2001, falling 35.1 per cent while the index slid by 13.6 per cent.

Sri Vishnu, which is traded infrequently, last closed at Rs 58 on July 16, unchanged from its previous close. At this price, India Cements' holding works out to Rs 7.6 billion.

Analysts believe the cost advantage in acquiring Sri Vishnu will be small, but stress that a new entrant may benefit from absence of other procedural hassles like getting mining leases. The new owner will also get an established brand name with an existing market.

Its strategic location in the southern part of the country gives Sri Vishnu an opportunity to earn better prices. The south has traditionally seen better cement prices than other markets due to fewer capacity additions and strong housing demand.

"If they have decent limestone deposits, which are scarce in the south, that will help them get a better price," said a sector analyst with a US brokerage.

Limestone is the cement industry's basic raw material but it is located mostly in the western and northern markets, one of the reasons, why more capacities have come up in those regions.

Tell us what you think of this report