Should You Apply for Nuvoco Vistas Corporation IPO?

In the week ended August 6, Indian capital markets witnessed four Initial Public Offerings (or IPOs). These were Krsnaa Diagnostics Ltd (NS:KRSN), Windlass Biotech, Exxaro Tiles Ltd (NS:EXXA), and Devyani International. Krsnaa got subscribed 64.38 times, Windlass Biotech subscribed 22.44 times, Exxaro subscribed 22.65 times, and Devyani International subscribed 116.70 times. Another IPO—Nuvoco Vistas Corp. Ltd is set to hit the markets on August 9.

Nuvoco Vistas Corporation Ltd IPO

Established in 1999, Nuvoco Vistas Corporation Ltd is a part of the Nirma Group. The company's diversified product offerings include cement, ready-mix concrete, and modern building materials, including dry plaster, cover blocks, adhesives, and wall putty. It sells its merchandise in the trade vertical consisting of individual home buyers and non-trade vertical, including institutional buyers. The company's robust distribution network covers a little less than 16,000 dealers and 225 carrying and forwarding agents. Nuvoco's manufacturing facilities are in Chattisgarh, Jharkhand, West Bengal, Bihar, and Odisha in eastern India. Apart from these, its cement plants are located in Rajasthan and Haryana in north India. The aggregate installed capacity of Nuvoco's all plants is 22.32 MMTPA.

Nuvoco Vistas's public issue will open for subscription on August 9, and it will close on August 11, 2021. The issue size is estimated at Rs. 5,000 crore of equity shares with a face value of Rs 10 per share. Out of Rs. 5,000 crore, it intends to raise Rs. 1,500 crore from a new issue, whereas it plans to garner Rs. 3,500 crore through offer for sale. Most notably, Nuvoco intends to repay the borrowings from Rs. 1,500 crore to be raised instead of using that money for expansion of any sort. The issue price is fixed at Rs. 560 to Rs. 570 per equity share. The minimum order quantity is 26 shares, and retail investors can apply for in multiples of 26 shares up to a maximum of 13 lots or 338 shares.

Factors weighing for Nuvoco Vistas

Who doesn't know the Nirma advertisements of yesteryears? The Nirma Group is the promoter of Nuvoco Vistas. A glance at the promoters suggests that they have rich business experience. The group is a well-diversified conglomerate. The company is the largest cement and concrete manufacturer in east India, capturing around 17% market share. On a pan India basis, Nuvoco ranks at the 5th position in terms of largest cement manufacturers. The B2C (i.e., trade segment) accounts for 73% of its total revenue, while the remaining 27% comes from its B2B (non-trade segment).

Most cement companies focus on the trade segment, where margins are pretty high. Nuvoco's substantial revenue comes from this only. The company's manufacturing sites are located much nearer to the primary raw material, i.e., limestone reserves. Their distribution network is well placed in terms of connectivity to rail and road transport. It bodes well for Nuvoco to keep its production cost low.

Nuvoco Vistas Financials

Now let's take a look at Nuvoco's three-year financials. The company's total assets grew 1.4% year-on-year in 2020, whereas it increased by 46.6% in 2021. Revenue surprisingly declined 4% year-on-year in 2020 to Rs. 6,830 crore. Note that the pandemic effect had just started in the second half of March 2020. More surprising is the double-digit —10.1% rise in revenue in fiscal 2021. While Nuvoco's profit after tax was up 1041% to Rs 249.2 crore in fiscal 2020, it turned into Rs 25.9 crore loss in 2021. The PAT margin is meager in fiscal 2020. The trend appears to be very topsy and turvy and vividly inconsistent. It may be due to the volatility of consumption linked with the trade segment where maximum revenue comes. It doesn't augur well for the company.

The government of India's infrastructure push, thrust on 'house for all' program and affordable housing, revival in real estate should drive Nuvoco's top-line growth. However, the overall picture of the cement industry doesn't appear to be rosy. The industry's growth has stagnated since 2014, and the situation is not expected to get better soon. The average per capita cement consumption in India is between 200 kg – 250 kg, almost 50% below the global average per capita cement consumption.

Nuvoco Vistas valuation and peers

Nuvoco's peer group consists of Ultratech Cement (NS:ULTC), Shree Cements Ltd. (NS:SHCM), Ambuja Cements Ltd. (NS:ABUJ), and ACC (NS:ACC) Cement. The PE of these companies is 30.8x, 67.3x, 24.8x, and 24x, respectively. On a return on an equity basis, The company's 4.7% is the lowest in the peer group. Ultratech has the highest with 14.8%, and Ambuja Cement has the lowest with 10.6% in the peer group, excluding Nuvoco. However, the only respite comes from the net asset value of Rs 217.8, which is the second-highest in the peer group.

Nuvoco Vistas risk factors

Remember, the USA reported around 100,000 covid cases on August 6—the highest in the last six months. The delta variant has flooded nearly half of China. India's vaccinated population currently stands at 50 crores, out of which only 11 crores had their second dose. We shouldn't forget covid still has the potential to derail the country's economic recovery and the globe as well. The second risk factor comes in over 1,000 legal cases against the company, and we can't fathom the extent of contingent liabilities associated with these cases. The most significant risk factor is the price elasticity of demand which is dominant in the cement industry. If Nuvoco increases the price, the trade segment customers will most likely turn to other cement manufactures. So, the company has hardly any opportunity to drive the revenue higher by increasing the price.

Conclusion

On the plus side, Nuvoco's management has vast experience with a proven track record. The company's core strength lies in its lower cost of production and distribution channels. Very high competition, little scope for the price increase are the significant headwinds. Having discussed this, the overall dynamics of the Indian cement industry don't look very promising even in the short to medium term in consumption terms.