Murli Industries’ cement division sale will help its prospects
Moneylife Digital Team 23 November 2010

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.

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