The first thing German major Heidelberg Cement has done after infusing Rs 359.1 crore in Mysore Cements through a preferential allotment is to repay debt to banks and financial institutions, and make the company debt-free. At the end of FY06, the company had long-term debt of over Rs 250 crore.
Mysore Cements has been ailing with accumulated losses of nearly Rs 350 crore. Even in FY06, which has been a reasonably good year for other cement companies, the company increased its loss to Rs 36.3 crore as compared with a loss of Rs 24.1 crore in the previous year. The company, which has a capacity of 2.07Mt a year faced sluggish demand in central India till Q4 FY06. At the operating level, it faced cost pressures owing to a rise in fuel and power charges, higher freight costs and loading restrictions.
Heidelberg will own 50.57 per cent in the company through preferential allotment (42.09 per cent) and the SK Birla group’s sale of shares (8.48 per cent). Its open offer to the public would also increase Heidelberg’s shareholding further. Mysore Cements is operating at full capacity, and the reduction of about Rs 30 crore as interest on long-term funds should help the company return to profitability. In Q1 FY07, the company made a profit before tax of Rs 4.2 crore after an interest charge of Rs12.64 crore. Net sales also improved by 27.5 per cent and operating profit margin went up by 950 basis points to 15.45 per cent, which is impressive. The company is expected to increase capacity to about 3Mta.
Going forward, high cement demand, cash infusion and improved productivity should result in a much better performance. At the current price, the stock trades at a 10 per cent discount to the open offer price of Rs 58, but with solid prospects for both the cement industry and the company, shareholders will benefit by staying with the company.