The Hindu Business Line : Gujarat Ambuja: Pare Exposures

WITH the possibility of a sizeable financial burden that could take a toll of its earnings and growth, shareholders of Gujarat Ambuja Cements can pare exposures. The stock's valuation has not factored in this element and that can be used to good effect by shareholders.

Of course, if this burden does not materialise, investors can re-enter the stock as it continues to be the best play in the cement sector.

The risk follows stems from the review by the Securities and Exchange Board of India (SEBI) whether Gujarat Ambuja's acquisition of a 14.4 per cent stake in ACC triggers an open offer under the `change in control' clause. SEBI had originally taken the view that there was no change in control and ruled that an open offer was not needed.

This was when Gujarat Ambuja purchased this stake from the Tata group, between December 1999 and September 2000, in three stages.

Now, following a stinging directive from the Securities Appellate Tribunal, it has been forced to take a fresh look at the entire issue by following proper procedure.

Stiff bill in store

If SEBI now decides that an open offer is triggered under the `change in control' clause, it could have serious implications for Gujarat Ambuja Cements. A burden of around Rs 970 crore from an open offer for 20 per cent of ACC's equity at Rs 370 per share would then become a reality.

In such cases involving quite a few MNCs, SEBI has usually directed interest payment at 15 per cent per annum for the period of delay.

Reckoned conservatively from September 2000, when it picked up the last of the three tranches to take its stake to 14.4 per cent, Gujarat Ambuja may well have to fork out around Rs 325 crore as interest. The total bill may then come to around Rs 1,300 crore.

If it decides to appeal any SEBI decision, Gujarat Ambuja would run the risk of this interest element getting stretched for the appeals period too (if the appeal goes against it). The appeal process has a stiff cost, Rs 12 crore for every month the process goes on.

Tough financing options

If it comes to an open offer, Gujarat Ambuja may not find it as easy to rustle up the finances as it did in 1999-2000 when it acquired DLF Cements and the ACC stake almost simultaneously.

It then had a comfortable balance-sheet with debt at less than half the shareholder funds. Since then there has a ballooning of its debt burden.

This is due to the acquisitions as well as investments in a two million tonne cement plant in Maharashtra which is now on stream.

By vesting Ambuja Cement Eastern and the ACC stake in Ambuja Cement Holdings and placing the latter's equity with FIIs, the group raised Rs 360 crore in equity which helped cut the debt to some extent.

Still the long-term debt, at Rs 1,677 crore as of June 2002, represents a two-fold jump over the levels that prevailed before it embarked on acquisition in 1999-2000.

The debt is now 1.1 times the shareholder funds — at a level where lenders may not feel too comfortable, especially if more debt is to be added.

Good debt management, but...

The company has in the last three years moved completely away from financial institutions and relied on market borrowings through bonds and debentures to manage its debt requirements.

Funds raised by bonds/debentures have risen from Rs 279 crore in June 2000 to Rs 1,002 crore now.

Long-term bank borrowings and foreign currency borrowings are also up more than three fold at Rs 189 crore and Rs 606 crore respectively during this period.

By moving to market-based borrowings, switching from high- to low-cost debt and an euro convertible bond offering carrying nominal coupon rate, Gujarat Ambuja has managed to keep its interest costs under check despite higher debt levels. For 2001-02, it ended with interest charges at Rs 96.6 crore, down 28 per cent from 2000-01.

A better picture may be available if the amount of interest capitalised is available.

Going forward, if it has to cough up Rs 1,300 crore for the open offer, things could change quite significantly.

For starters, it would have to take recourse to debt to complete the open offer which would be a time bound process and only later hope to replace a part of it with equity.

This exercise could take the debt burden close to Rs 3,000 crore leaving debt at twice the shareholder funds. Such a development could lead to a higher cost of debt as financial risks would increase considerably.

Limited equity options

There are three more factors that may have a bearing in this context and which could affect its profitability:

After the private placement of Ambuja Cement Holdings' equity with FIIs and the Euro convertible offering of Rs 461 crore, the company's financial flexibility in replacing debt with equity is considerably limited.

The firm control over ACC would be positive. But even then Gujarat Ambuja may be able to raise equity at a much lower price than the market trends.

This could mean a sizeable expansion in the equity base which could adversely affect the stock's valuation.

The fact that the Euro Convertible Bonds may not be converted into equity is a live threat.

The conversion price is Rs 225 per share and unless it is lowered, there may not be much attraction for bond holders to convert.

At the current price levels, the conversion price carries a 40 per cent premium to the market price. If this conversion does not happen, it could leave debt levels higher as the planned replacement with equity will not happen.

The acquisition of ACC will also not give much flexibility since ACC itself has a sizeable debt burden which it is in the process of cutting gradually.

Aiding factors

What may help Gujarat Ambuja are its high operating efficiencies — through the years it has had OPMs in excess of 30 per cent, barring the most recent quarter — and the likely improvement in cement prices due to better demand — supply balance.

These may provide it with room to manage any emerging open offer risk and attendant financial burden. But its earnings levels and stock valuation levels would take a hard knock.

It would also take a quite a long time to recover from such a position. Its best hope may still be that SEBI would rule against an open offer and it is able to continue its `low cost strategy' of having ACC in its fold with just the Rs 700 crore paid to the Tatas as the price.

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