Shree Cement to buy JP's cement grinding unit for Rs 360cr

Below is the verbatim transcript of HM Bangur’s interview with CNBC-TV18’s Menaka Doshi and Anuj Singhal

Menaka: Can you talk us through the details of this acquisition that you are making?

A: The details are yet to materialise. The only thing is that we have signed a agreement and subject due to diligence we will like to acquire and they will like to sell the unit. The due diligence process is on and only after that the details will come up.

Menaka: We have some details on our news flashes saying that this agreement at Rs 360 crore to buy cement grinding plant of 1.5 million tonne per annum capacity in Panipat?

A: The information is correct. The Rs 360 crore is the price and then it is all subject to due diligence of certain things. Whatever the other liabilities or the assets are there, small changes in the transaction cost will be there.

Menaka: Can you talk us through the valuation of this Rs 360 crore and how you arrived at that and also the strategy behind Shree Cements wanting to purchase the plant?

A: We have put the clinkerisation unit and we had shortage of grinding units. So, we were thinking of putting up a grinding unit in Haryana and other part we have already in Rajasthan. So, for Haryana we were finding that land should be purchased and it will take about two years and the two grinding units will cost around Rs 350-370 crore somewhere in between. So, it is basically a retracement cost.

Anuj: In terms of EBITDA per tonne, if you could give some numbers on that valuation front?

A: That valuation, EBITDA per tonne is not the – because it is starting from the intermediatory, it is not a total plant, but we think that our marketing in North India will go cheaper by Rs 200 a tonne and our production cost there will be that much down.

Menaka: Can you also talk us through the process, were there a variety of bids invited by JP or was this a one-on-one conversation that JP Associates was having with you?

A: I don’t know much about from the JP side, but we were not part of any group. They had talked to us, they might have talked to many others or they have not talked, that I am not able to say.

Menaka: But there wasn’t any secret bid process that was carried out or anything like that?

A: No, it was not that we had not given a secret bid. I had met them and we discussed about a price and then they took some time. In the meanwhile they might have consulted themselves or somebody else; I don’t know what happened from their side.

Menaka: What was the timeline, when did you originally meet them and how long has it taken for this deal to fructify?

A: The deal is going through for about last one month or so. We have been talking them and it is a continuous melting process. No firm date can be given.

Menaka: But few months, few years?

A: About a month back we started talking.

Menaka: The reason I am asking you all of these questions is Rs 360 crore while it is a material amount it is not very material when it comes to JP Associates debt and their effort to pay down that debt. So, were they discussing to you several other cement related asset sales or was it just you were only interested in this one Panipat grinding plant so with you they have only discussed this?

A: We were already interested in this part of the grinding plant and we were putting up everything from the Greenfield. I don’t know about the JP strategy but we were interested only in one unit.

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Menaka: You have given us some sense of why you wanted that particular location, Panipat and you said this is that replacement cost. So give us a sense if this deal was to go through, let’s say in the next couple of months at approximately this price if your due diligence works out that way etc then give us a sense of what it means for your earnings in the sense of your financials as well?

A: We are thinking that in time to come we are taking a position that Indian cement market will grow at eight percent or more. So to be prepared we had less grinding capacity compared to our clinkerisation capacity. But we should not be caught unaware, so we thought the new plant will take two years but if this plant is ready and the demand comes suddenly we can cater to the needs of the country.

Menaka: So you are counting on a big upsurge in demand in as short as six month period?

A: We have taken the position that if the demand comes we are prepared with it. If it doesn't come then we have got the assets of one year too early.

Menaka: What do you make of prices currently, specifically in that market which is in the north and across India as well?

A: We are a regional player. In this part of the country the prices will be around Rs 250 – 260.

Menaka: Do you see scope for them to move further up over the next few months to come or what is your view on prices right now?

A: Equal chances are that it can go up or it can go down. The monsoon season is almost coming to an end in a month and normally after the monsoon season the price of cement firms a little.

Menaka: So you are counting as of now on a firming up of cement prices over the next three to four months?

A: No, I am not counting on that. It is because for one year or so we have not purchased the unit. We have taken the unit taking 50 years view in account.

Menaka: But I am asking for a more immediate term view, not just particular to this unit but across your business. I am asking you for a more immediate view?

A: For the business as such the cost push is there and compared to six months back the prices are lower. So we think the price has an inherent tendency to go up a little.

Menaka: Even though this has been a deficient monsoon and that might impact rural spending to some extent or you don’t expect it to impact rural spending?

A: No, we expect it but everything has a limited effect. It will be wrong to say that there will not be any effect. Rural spending will be effected a little. But still because of the other macroeconomic forces and the right noise by the reserve bank and the government that Gross Domestic Product (GDP) will be higher than the last year then from somewhere else; service sector or other industry sector money will be generated and put to the right use.

Menaka: By when do you expect to make a final decision on this deal with Jaypee Associates?

A: It depends on the due diligence of people.

Menaka: How long do you expect that process to take?

A: I expect them to take 10 to 15 days and after that the regulatory commissions and permissions have to be taken.