Reliance Infrastructure’s plan to sell its entire cement business to Birla Corp will help the company reduce its debt and is part of its overall strategy to cut debt and move away from businesses that are very long gestation and where it is not a market leader.
Anil Ambani-led Reliance Group on Thursday said it plans to sell its 5.08 million tons of cement plants to Birla Corp for a total of Rs 4,800 crores. The company’s debt rose to Rs 26,600 crores as of the first quarter of FY16, compared with Rs11,670 crores in FY11. Despite the seemingly high debt the company has less than one times debt to equity ratio.
The group has been restructuring its businesses in line with its longer term strategy of increasing focus on defence, and allying with Reliance Jio in telecom space. The company is acquiring control of Pipavav and is on track with plans to sell assets in cement, road and Mumbai power business.
Its unit Reliance Cement Company Pvt Ltd, has total cement capacity of 5.08 million tons with plants at Maihar in Madhya Pradesh having capacity of 3 million tons and Kundanganj in Uttar Pradesh 2 million tons. It also has a grinding unit of 0.5 million tons at Butibori in Maharashtra. The sale is subject to approval by Competition Commission of India and other regulators.
Birla Corp is a flagship company of the MP Birla Group. The proposed deal values the cement business at $140 per ton, and will increase its capacity 15.5 million tons. The company was also in talks with Lafarge-Holcim group to buy its 5.15 million tons of its plants in Chhattisgarh and Jharkhand.
Reliance Infrastructure said if the deal gets fructified, it will help improve the earnings per share (EPS) of Reliance infra shareholders. The agreement is subject to formal approval from Competition Commission of India and other regulatory authorities. SBI Capital Markets helped Reliance infra as financial advisor for the transaction.
Cement is a key input for the government’s infrastructure push. About half of all cement production goes to housing sector in India, while 23 per cent goes to irrigation, another 15 per cent to infrastructure, and 5 per cent to roads. Most of these sectors are witnessing a slowdown and are unlikely to pick up quickly.
The cement industry produced 261 million tons in FY15 compared with a capacity of 336 million tons. The gap was narrower in FY12 when capacity was 292 million tons and production was 225 million tons.
With a per capita consumption of 190 kg, the industry expects capacity to increase further to 420 million tons by March 2017. So, unless demand picks up companies will be forced to sell at a narrow margin in the short term.
