India Cement issues GDR

Offering promoted as turnaround play after company moves back into the black.

Southern India's largest cement company, India Cement, raised $100 million after London's close on Thursday (October 13) from a 26.6 million unit offering. Under the lead of ABN AMRO Rothschild and Deutsche Bank, the group priced the deal at $4.3226 per unit.

At this level it came at a 3% discount to the stock's Rs100 close on the Bombay Stock Exchange on Thursday. One unit equals two shares and there is also a 15% greenshoe, which could bump proceeds up to $115 million.

Fund managers say the order book closed about three to four times covered, with participation from about 40 accounts. Geographically the book was said to have been pretty evenly split between the three regions.

Specialists comment that while demand was strong, investors are currently adopting a very binary view towards India. "It's very black or white at the moment," says one. "Investors either believe the stock market still has some way to run, or they think it's due for a correction."

Year-to-date, India Cements is up roughly 60%, but was fairly volatile over the course of the two-week roadshow hitting a high of Rs110 and low of Rs97 before re-bounding back to Rs100. It is currently trading on a 2006 EV/EBITDA valuation of 11.1 times. Larger comparables (by capacity) such as ACC and Gujarat Ambuja Cements are respectively trading at 11.2 times and 9.8 times.

On a near-term P/E basis, the stock looks extremely expensive. On a 2006 basis, for example, it is currently trading at 57.4 times compared to 18.2 times for ACC and 16.9 times for Gujarat Ambuja.

It cheapens up on a 2007 basis at 12.7 times versus 14.9 times for Gujarat Ambuja. The reason for this is that the company only turned profitable in the first quarter of the 2006 financial year after three years of losses and a debt restructuring triggered by overaggressive M&A.

In the three months to March 31, revenue rose 44.8% year-on-year to Rs3.81 billion, while net profit swung from a loss of Rs181 million to a profit of Rs52 million. Analysts say the company's positive outlook is being driven by increasing demand and limited industry wide capacity additions over the next couple of years.

Selling 40% of its capacity in Tamil Nadu also benefits the company as it is said to be the fastest growing region in the whole of India.

Proceeds from the issue are being used to repay debt. If you include the greenshoe, the deal will represent about 20% of the company's enlarged share capital.