The diversified company had put too much on the line with its ambitious cement foray, hurting its profitability. The proposed sale will give it some room to breathe
Nagpur-based diversified company Murli Industries Limited (MIL) is close to offloading its cement division to Mexico's Cemex, the world's number three cement maker, according to media reports.
After putting in considerable resources to fund this ambitious project, MIL has found the going tough in this segment and has rightly called off all bets on the cement business. This is a remarkable step since Indian companies are usually in an empire-building spree and are loath to part with losing assets.
MIL made its ambitious foray into cement last year, but was weighed down by the debt it used to build capacities. Now that it is selling off its cement business, the company will be able to concentrate more on its core businesses-solvent extraction, paper and power.
For a company with limited internal accruals and size, its expansion plans for the cement business were highly optimistic. MIL commissioned its first cement plant in Chandrapur, Maharashtra, in February this year, with an installed capacity of 3mtpa (million tonnes per annum).
Faced with inadequate cash flows from existing businesses, MIL was forced to borrow heavily from banks to fund its cement foray. The company had borrowings of Rs972 crore as on March 2009, up 41% from Rs688 crore in the previous year. Its debt-to-equity ratio stood at 3.73 by the fiscal year ending March 2009. As on March 2010, its borrowings stood at Rs1,183 crore, translating into a debt-to-equity ratio of 3.83.
The company had further plans to set up two additional cement plants in Karnataka and Rajasthan, each with a capacity of 3mtpa, along with two captive power plants of 50MW each, on an investment of Rs 1,135 crore each. The cement plants were expected to be operational by the middle of 2013. This would have put additional burden on the books.
We had written about the company's plans in Moneylife (issue dated 23 September 2010) that "these projects were planned in 2007-08 when the market was extremely bullish and smaller companies could easily raise money from a variety of sources. But the situation has changed in the past two years. In fact, given the company's small net worth of Rs265 crore at the end of FY08-09 and large borrowings, capital-intensive growth plans appear too ambitious."
Indeed, interest costs for the company have risen substantially-the September quarter saw a 158% jump in interest outgo to Rs26 crore as it serviced the huge loans taken earlier. During the quarter, the company's revenues jumped by 92% to Rs132 crore compared to Rs69 crore a year ago. However, net profit plunged 74% to Rs2.73 crore, due partly to the rising interest cost.
MIL has been on the look-out for a potential buyer for a while now, but could not find a one that could match its valuation of the business. The cement industry as a whole is facing strong headwinds and a wave of consolidation has already begun to some extent. Small cement companies in the country have been snapped up by large foreign counterparts; the most recent was French cement maker Vicat SA's acquisition of a 51% stake in Hyderabad's Bharathi Cement.
Assuming that the sale of MIL's cement unit does go through, it would ease a lot of pressure on the company's books and would work out in its best interests for the long term.
Today, the Indian market was highly volatile on the back of the developments along the Korean border and over concerns over the political future of the UPA-led government, which has been rocked by corruption allegations.
The Sensex opened at 19,841.42; 116.17 points lower compared to its previous close of 19,957.59. It hit an intraday low of 19,342.69-which is the maximum low in the past three months from 16 September 2010, to close at 19,691.84. This was 265.75 points down (1.33%) from the previous day's close. The Nifty ended 75.25 points down (1.25%) to 5,934.75.
In today's market fall, among the Sensex 30 stocks, Maruti Suzuki and Hindustan Unilever were the only stocks which ended positive. The maximum fall was seen in Tata Power (3.04%) followed by SBI (2.83%). Out of the Nifty 50, only eight stocks ended in positive terrain.
All the BSE sectoral indices were in the negative. The maximum loss was noticed in BSE Realty (3.26%) followed by BSE PSU (1.85%) while the BSE TECk, BSE IT, BSE Capital Goods, BSE Healthcare and BSE Auto indices fell in the range between 0.06% to 0.90%. Among the other indices on the BSE, BSE IPO fell the maximum (2.11%) followed by the BSE Small-cap index (which fell 1.70%).
All Asian indices closed in the red (in the range of about 0.50% to around 2.70%) except for the Nikkei 225, which ended positively flat-92.80 points up to end at 10,115.19. China's Shanghai Composite fell 1.94% to a six-week closing low of 2,828.28 today, due to the recent monetary-tightening measures and the Korean imbroglio.
Global markets were hugely influenced by the North Korean revelation to move ahead with uranium enrichment, a possible second path to manufacture material for atomic weapons. North Korea also fired dozens of artillery shells at a South Korean island.
US markets were in the red. The Dow opened about 2 points below the previous day's close and was trading 24.97 points below (at 11,178.58) while in the European market almost all indices ended in the red.
On Monday, foreign institutional investors and domestic institutional investors moved together in the same direction. They pumped in Rs336 crore and Rs212crore respectively into Indian equity markets.
In corporate developments, state-owned Hindustan Petroleum Corp (HPCL) and its partners will divest 40% of their stake in a gas-bearing block in offshore Australia to US-based Apache Corp.
"We have agreed to farm out a part of our stake in WA-388-P to Apache," said HPCL CMD Subir Roychowdhary. HPCL, Bharat PetroResources Ltd (a unit of state-owned BPCL), Gujarat State Petroleum Corp (GSPC) and Videocon Industries each have 14% interest in the block. Post-divestment, their stakes will drop to 8.4% each.
Bharati Shipyard, one of India's leading ship-building companies, today said it has proposed to acquire majority 51% equity stake and management control in south-based Tebma Shipyards Ltd for a consideration of Rs 75.75 crore. Earlier, Bharati Shipyard had successfully acquired Great Offshore for Rs880 crore, after a fierce takeover battle with ABG Shipyard Ltd.
As part of its continuing divestment programme, the government has decided to sell 30% stake held through Telecommunications Consultants of India Ltd (TCIL) in Bharti Hexacom Ltd. Minister of state for communications and IT, Sachin Pilot, informed the Lok Sabha today, that the government has approved 'in-principle' sale of the entire 30% stake of TCIL in Bharti Hexacom.
The sale should be at the "right time to obtain the best price", he added.
Bharti Airtel holds 70% and TCIL holds the remaining 30% in Bharti Hexacom. To another query, Mr Pilot said that the government had taken various steps, including setting up of special economic zones and task forces, for the development of the hardware sector in the country.
Utility vehicle and tractor major, Mahindra & Mahindra today signed a definitive agreement to buy 70% in the troubled South Korean vehicle maker SsangYong Motor Company (SYMC) for $463 million (Rs2,083 crore). The agreement was signed by Yooil Lee and Youngtae Park, joint-court appointed receivers of SYMC and Pawan Goenka, president (automotive and farm equipment sectors), M&M, in Korea.
M&M has agreed to subscribe to new stock of SsangYong worth $378 million and $85 million in corporate bonds.
Property advisors and researchers say residential property sales are slipping in the commercial capital due to high rates. With inventories piling up they expect to see a correction soon
Residential property rates in Mumbai should correct by 10%-may be even more-in the next few months, according to property experts, who are seeing demand slipping because of unaffordable prices. But the situation in the National Capital Region and the southern cities of Bengaluru and Chennai is quite different with sales showing an upward trend.
Sales of residential properties in Mumbai have fallen by 40% since the peak in May 2009, says Edelweiss Securities, mainly due to higher prices which have increased by 15%-20% over the past six months. Now, Edelweiss researchers say that while certain projects might see an uptick in sales, overall volumes are likely to remain subdued, for, even as there have been several new launches this festival season there have been few takers. With inventory levels piling up, they expect rates to fall back to the levels in April 2010.
Liases Foras, a real estate rating and research firm, believes the correction will be bigger. "We expect a correction of 20%-30% in Mumbai residential properties as according to our records the inventory has reached 81,000 units in the Mumbai Metropolitan Region, but volumes are too less," Pankaj Kapoor, founder and CEO, Liases Foras, told Moneylife.
According to Edelweiss, 5,300 property registrations were recorded in October, which has been slipping since July.
Jones Lang LaSalle, the global real estate services provider, thinks the correction in Mumbai will be seen only in some areas. "Certain areas in the south Mumbai, Bandra (West), Lower Parel and Mahalakshmi would see some corrections in residential property prices as the market is stagnant in the wake of low demand, lack of new supply and high prices," Arun Chitnis, assistant vice-president (marketing), Jones Lang LaSalle (India) says. "It's difficult to comment of the percentage of correction because it depends on the area. But I think it could be between 7% and 15%, not more. If prices fall by more than 15% people will start buying properties again."
According to Edelweiss, another factor that has hurt the sentiment is the Reserve Bank of India (RBI) capping the loan-to-value ratio for housing loans at 80% and increasing the risk weightage for residential housing loans of Rs75 lakhs and above.
"The RBI's move on the loan-to-value ratio has increased the equity portion of buyers by 100% as earlier some banks were funding about 90% of loans. For instance, a buyer, who could manage to pay Rs10 lakhs now has to pay Rs20 lakhs which is difficult. The RBI's step will dampen sentiment of buyers and force price corrections in the near future," Mr Kapoor explains.
However, there has been a robust trend in the National Capital Region (NCR) and south Indian cities of Bengaluru and Chennai where volumes have increased in September-October, Edelweiss reported.
Volumes rebounded in Gurgaon in October, driven by good demand for new launches. There was a weak response in July-September, which has been attributed to limited launches in the market and low ready inventory of apartments.
But volumes in Noida have started to weaken, although they remain strong in absolute terms with the three-month moving average staying above 10,000 units.
In Bangalore too, volumes showed an upward trend in September (three-month moving average of about 2,000 units). Edelweiss believes that Bangalore may continue to surprise positively on increased hiring and salary hikes. In Chennai, volumes have reached the 2008 peak of 1,500 units.