Is Shivam Cement still an expensive proposition? Analyze the updated facts and figures before investing

~ Rishab Agrawal

The IPO of Shivam Cement Limited (SHCL) can very well be termed as the most awaited IPO in the stock market from real sector companies. It was converted into a Public Limited company in the year 2015 and now in 2019 the general public have been invited to apply for a stake in the company. Being the only company of its kind to be listed on the stock market, Shivam Cement has a huge opportunity to take the market by storm but it is not free of threats as well.

This IPO is expected to set an example for other similar companies and encourage them to move toward conversion to a public company. ICRA Nepal has assigned “[ICRANP] IPO Grade 3+”, indicating average fundamentals, to the proposed IPO of Shivam Cements Limited.

The board has planned to use the money raised through IPO for mainly two aspects, they are:

• Expanding Shivam’s production capacity.
• Lowering the debt in capital composition by paying off some of the bank loans.

Shivam Cement Limited is issuing its 5,79,640 units IPO shares at Rs 200 per unit to the project-affected locals of Makawanpur district and 41,20,000 units IPO shares at Rs 300 per unit to the general public from 6th Falgun, 2075.

In first phase, Shivam Cement had issued 8.80 lakh shares IPO for locals at Rs 300 per share. However, applications worth Rs 6 crore (2,00,240 units) only was collected from around 995 applicants till the last date.

This time the company has revised the price and set it at Rs 200. The already allotted applicants will be provided additional 1,00,120 unit shares as they had paid Rs 300.

The remaining 5,79,640 units shares is now open for application by the project affected locals at Rs 200.

The company is also issuing 44 lakh unit shares to the general public at Rs 300 per unit. Out of the total issuance, 2,20,000 units had been separated for the Employees of associated organizations and another 2,20,000 units for Mutual Funds.

Company Introduction

Shivam cements was founded in the year 2003. It began commercial production from the year 2011 and is the largest manufacturing Greenfield project in Nepal. It is currently producing 3000 TPD cement and 1900 TPD (Tones per Day) clinker from the company’s self-owned limestone quarries. With a broad vision of business, Shivam Cement Private Limited was converted into Public Limited Company in the year 2015 to provide its customers and the stakeholders to be a part of the company.

Shivam Cement Limited also holds 88% shares in Shivam Holding Private Limited which in turn holds 30% stake in Hongshi Shivam Cement Pvt. Ltd. (HSCPL), a JV with Hongshi Group of China which has set up a cement plant with grinding capacity and clinker capacity of 6000 TPD, whose commercial production has started from Jestha 2, 2075.

The authorized capital of the company is Rs.7 arba while the issued capital is Rs.4.4 arba

Composition of Board of Directors

The board of directors will consist a total of seven members. Their composition is as follows:

Existing Directors

• Surendra Kumar Goel (Chairman) - Managing Director of H.R. Goel Group, Arvind Emporium & director of various other companies like Asian Life Insurance Ltd., Starlime Industries Pvt. Ltd., etc.
• Raghunandan Maru (Director)- He is the also the Managing Director of JB Maru Group and a pioneer of mineral industries of Nepal having 25 years of experience in it. He is the director of other various companies like Laxmi Technoplast Pvt. Ltd., Ten Micro Sons Pvt., etc.
• Sandeep Kumar Sharda (Director)- He is also the director of Sharda Group Nepal, one of the largest private industrial and trading conglomerates in Nepal, which is involved in wide variety of manufacturing and trading products, ranging from industrial goods to consumer durables and non-durables.
• Amit More (Director)- He is also the Executive Director of Lucky Group Nepal Pvt. Ltd. and handling Ganapati Vanaspati Pvt. Ltd. as a director for past 11 years.
• Rohit Gupta (Director) - He is also the Managing Director of Teletalk Pvt. Ltd. He is a young entrepreneur having experience of 9 years in different industries & businesses.

Overview

Though Shivam Cement falls under the Manufacturing and Production index, it is the first cement producing firm to be listed on the stock market. Due to the absence of any direct competitor in the stock market, the company is likely to make most of first mover’s advantage and attract a considerable cluster of both individual and institutional investors.

Although in the first phase of the issue, the IPO remained undersubscribed due to high premium, a successful IPO could encourage other such companies to follow its steps and get themselves listed on the stock market.

Looking at the financials, the company posted a net profit of Rs.93.66 crore in the third quarter of FY 74/75. The projected net profit for FY 74/75 was Rs.1.14 Arba which was duly achieved. As per the provisional quarterly report for the second quarter, the net profit by the end of the period stands at Rs.65.78 Crore, growing by more than 20% compared to the corresponding quarter of the previous year. The projected profit for the current year is Rs.1.43 Arba.

SWOT Analysis

Strengths

• Strong operational and financial profile of SCL which is involved in the manufacturing and selling of cement within Nepal.
• Improvement in scale of operations aided by phased expansion in clinker and cement manufacturing capacities has resulted in stable profitability margins and improvement in increase in cash accruals for the company.
• Piecemeal expansions with partial equity funding has kept the indebtedness of the company in check and hence even though the debt levels have increased, the capital structure of the company has improved.
• The operating profitability is also supported by healthy cement realizations which have consistently improved.
• The promoters of SCL have experience in diverse businesses and have infused equity capital from time to time to fund capital expenditure in SCL and investment in Joint Venture.

Weakness

• Highly competitive business environment marked by the presence of a number of players given the small size of the overall market.
• Resultant limited pricing power therefore constrains the ability of the company to pass on input cost increases to the customers.
• The company has limited control on its input costs as the bulk of the raw material and fuel are imported and thus these prices are vulnerable to regulatory and geo-political changes in policies which can result in supply disruptions and/ or increase in costs.

Opportunity

• Nepal being a developing country cement demand is expected to remain robust which should aid improvement in scale and profitability going forward.
• Ability of the company to improve its brand recognition and pricing power will be the key driver for returns.

Threat

• The company needs to maintain its quality and competitive prices for the quality product.
• Political instability and growing inflation could be one of the major threats for the company.

Capital Plan

The promoter shareholders will be holding 88% of the total holdings while the general shareholders will be holding 12% of the total shares of the company. The promoters share would be of Rs 3.87 arba and the ordinary shareholders would be holding shares worth Rs 53 crore in total.

As we can see, the current issue of the company may also be the final issue as there is no increase in the projected capital plan of the company. However, the reserves are expected to grow along with time.

Net Profit

The company has also posted the net profits of past three years and projected net profit of the next two years. They give the following picture:

The graph gives a clear picture about the company’s growth in the posted net profit and projected growth in the years to come.

Second Quarter Highlights

The manufacturing giant also published its provisional quarterly highlights for the second quarter of current fiscal year 75/76. As of the second quarter, the company has a paid up capital of Rs.3.89 Arba which will increase to Rs.4.40 Arba after the IPO. The reserves of the company are worth a massive Rs.3.04 Arba, up by 71% compared to the corresponding quarter of the previous year.

The company posted a net profit of Rs.65.78 Crore by the end of the second quarter with revenue from sales of Rs.5.22 Arba. Compared to the corresponding quarter, the revenue figure went up by 28% and the net profit went up by 20%. The cost of sales stands at Rs.3.35 Arba and the company incurred administrative expenses of Rs.8.55 Crore by the end of the second quarter.

At the current level of earnings, the annualized EPS after the issue of IPO stands at Rs.29.90 while the P/E Ratio for locals will stand at 6.69 times. Similarly, the P/E Ratio for the general public will be 10.03 times.

Conclusion

From the above analysis we can conclude that Shivam Cement Limited is an established company that has performed well in the past and is expected to perform even better in the future. A strong and experienced board will take this company to new heights. Due to excessive premium amount, the IPO issue for the locals remained unsubscribed. However, citing this reason the company is now issuing shares at reduced prices, not only for the locals but also for the general public.

It is expected that the IPO will be oversubscribed and investors may choose to hold shares of the company for the long term as a safe bet in their portfolios that will ensure consistent return to investment in the form of cash dividends and value appreciation.