Shivam Cement’s IPO: An expensive proposition or a lucrative opportunity? See the detailed analysis of the ‘First of its kind’ IPO issue

-Rishab Agrawal

The IPO of Shivam Cement Limited 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 2018 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.

Here are some details about the company an investor ought to know before applying for the IPO to get a clearer picture about the company and what they can expect from the company in the years to come.

Synopsis of the Issue

Name of the organization: Shivam Cement Limited

No. of Shares: 3,87,20,000 units of promoter shares and 52,80,000 units of ordinary shares

Amount to be collected: Rs.4,40,00,00,000

Issue Manager: Siddhartha Capital Limited

Shivam Cement is going to issue 8,80,000 unit shares as its Initial Public Offering for the locals of Makawanpur district from Shrawan 13, 2075. The issue made at a price of Rs 300 (Rs 100 plus premium of Rs 200) will last till Bhadra 11, 2075. While 44 lakh shares IPO for general public at Rs 400 per share will be offered and the offer letter for the same will be within 3 days of allotment of shares to the local public.

The interested applicants from Makawanpur district can apply for a minimum of 10 units and for a maximum of 10,000 units of the issued shares. The applicants can place their applications through C-ASBA but it is not made mandatory. The interested locals can collect application forms from any of the financial institutions listed as collection centers in offer letter and can submit their applications in the various designated collection centers in Makawanpur districts.

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.

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 is Rs.1.14 arba. These figures are expected to grow at 25% and 62% taking FY 74/75 as base.

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.

Peer Companies Performance at Glance

Being in the manufacturing and production sector, Shivam cement will face cut throat competition from other real industries like Himalayan Distillery Limited, Bottlers Nepal Limited, and Unilever Nepal Limited etc. Shivam Cement will have to fair against strong P/E ratios and Earnings per share posted by the above mentioned companies in their quarterly reports of the last (third) quarter.

Here are some figures posted by similar companies that Shivam Cement will have to compete against:

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.

Though the share price seems expensive due to the high premium price the 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. Also due to the lack of regulator in the area, some people are not showing much interest in the IPO as well. It has to be seen how the issuance of IPO will perform.