Upcoming IPO of one of the best Cement Company Sarbottam Cement IPO Issue in Pipeline

Sarbottam Cement  has proposed to issue an IPO worth 60 lakh shares to the General Public. The company is certain that the final price will not be lesser than Rs. 750 per share. However, institutional investors (book builders) have yet to bid for the IPO. After institutional investors submit bids with a quoted price for 40% of the shares (24 lakh units), the remaining 46.66% (28 lakh units) will be issued to the general public and 13.33% (8 lakh units) to the project affected people at 10% lesser than the quoted price. As recent update, Company has been appoint 4 issue manager for share issue. This company will be the first company who is going to issue IPO share from Book Building Process .

Appointed Issue Managers are as following:

1. Global IME Capital Ltd.

2. NIBL Ace Capital Ltd. and 

3. Prabhu Capital Ltd

About Saurabh Group

Saurabh Group’s journey began from Myanmar. Till the 1960’s, Bishnu Prasad Neupane’s father, Lila Ram Neupane, was doing retail business alongside running a butter processing factory in Lashio town in the Shan state of Myanmar. After Buddhism was made the state religion in the 1960s, people of Nepali and Indian origin were forced to leave the country. Lila Ram Neupane made a decision to leave Myanmar and resettle in Nepal and started his own business with a wholesale store of textiles in Bhairahawa. During that time, textiles were brought from Kathmandu and distributed there. Later, he also took dealership of the National Trading and Salt Trading Limited.

It was in 1964 when the business took shape of a group and was further diversified. Bishnu Prasad Neupane took up responsibility in 1986 and started the Jagadamba Cement Industries, his first manufacturing venture, in the early 1990s.

Saurabh Photo International, the authorized distributor of Konka products, was in the agency trading business since 1990 and has a strong presence in the market. Currently, the group is mainly involved in the production of cement, steel, tea, spun yarn, PP Woven fabrics, calcium carbonates and other such products. The group’s trading activities continue with imports of Konka products, Citizen watch components and other Chinese products.

Currently, the group is mainly involved in the production of cement, steel, tea, spun yarn, PP Woven fabrics, calcium carbonates and  more. Group’s trading activities are continued with imports of Konka products, citizen watch components and other Chinese products. In the fiscal year of 2016/2017, total turnover of the group exceeded NRS. 3000 crore, equivalent to‎ US$ 291 million. The group has the strength of about 4000 employees from different sectors.

Saurabh Group of Companies are as follows:

1. Sarbottam Cement 

2. Laxmi Steels Pvt Ltd

3. Jagadamba Cement

4. Jagadamba Spinning Mills

5. Saurabh Tea Estate

6. Saurabh Shree Jagadamba Builders

7. Jagadamba Syntketic 

8. Shubha Shree Jagadamba Cement

9. Saurabh Photo International

10. Force Electronics

11. Jagadamba Tea Processing and

12. Qualiti Roto Packaging

About Sarbottam Cement

A sister concern of Saurabh group, our unmatched quality of OPC and PSC cement solutions has been used in a wide variety of projects ranging from individual homes and small office buildings to huge projects that are architecturally and technically challenging, such as industrial structures, bridges, dams, irrigation canals, highways and runways. Our cement solutions were also used for redeveloping and building the affected communities after the major earthquake that hit Nepal in 2015.

With the increasing urbanization taking hold and impacting people and the planet, at Sarbottam Cement we provide building solutions and products with a clear sense of responsibility and commitment towards social and environmental sustainability.

An innovator and pioneer of the cement industry of Nepal, Sarbottam Cement Pvt. Ltd. (SCPL) is the first and only cement manufacturers to use a completely European production line.

Also the first and only manufacturer that produces cement through the use of a Vertical Roller Mill (VRM). This innovative technology allows us to save up to 50% in energy consumption, thereby drastically reducing our carbon footprint. In this regard, we are the only Nepalese cement manufacturer able to produce eco-friendly or “green” cement.

As healthy dishes can only be made from healthy & fresh ingredients, quality cement can only be made from quality limestone. Dissatisfied with the poor limestone available – substandard in the amount of Calcium Oxide while often containing high levels of Magnesium Oxide – we at Sarbottam Cement have purchased various mines in limestone rich Palpa & Chitwan districts. These mines make available to us some of the finest limestone in the country, and as a result, we are able to deliver to our customers the highest quality cement possible.

Understanding that the majority of our cement is utilized in earthquake prone areas, Sarbottam Cement is uncompromising when it comes to strength and quality. In fact, we here at Sarbottam Cement have pledged to provide cement that all our customers can trust. Our energy efficient production methods coupled with our high quality raw materials means that our cement just cannot be beat – not by other manufacturers, nor by harsh elements & natural disasters.

Sarbottam Cement Products & Features

Though equipped Company Sarbottam cement actively produces as following  product details:

A. Portland Pozzolana Cement (PPC)  

B. Sarbottam Green Ordinary Portland Cement™ (OPC) and 

C. Sarbottam Shree Green Portland Slag Cement™ (PSC).

ICRA Rating of Sarbottam Cement IPO

ICRA Nepal has assigned an issuer rating of [ICRANP-IR] BBB+ (pronounced ICRA NP issuer rating triple B plus) to Sarbottam Cement Limited (Sarbottam). ICRA Nepal has also reaffirmed the long-term rating of [ICRANP] LBBB+ (pronounced ICRA NP L triple B plus) and the short-term rating of [ICRANP] A2 (pronounced ICRA NP A two) to Sarbottam. The reaffirmed ratings have been removed from watch with negative implications.

Rationale

The rating action factors in the company’s improved financial profile with reduced gearing levels (0.59 times as on midJanuary 2021 against 1.65 times as of mid-July 2019) and strong operating margins (~24% for H1 FY2021) despite a gradual decline amid the increasing competition. ICRA Nepal also considers the company’s strong operational profile with healthy volumetric sales growth in FY2020, despite the impact of the Covid-19 pandemic (~23% YoY growth; ~78% growth in 8M FY2020, i.e. prior to start of the pandemic). The ratings also derive comfort from the company’s experienced promoter profile with ~62% stake held by individuals from the Saurabh Group, which has an established presence in manufacturing and selling of construction materials, among others. The company’s debt service indicators remain comfortable with an interest coverage of 3.7 times and DSCR of 1.5 times for FY2020. These indicators have further improved in H1 FY2021 with good sales performance as well as reduced interest rate outlook in banking. Sarbottam’s financial flexibility also remains healthy with low reliance on working capital borrowings (~51% of drawing

power utilised as on mid-January 2021). The company’s improving brand recall, extensive dealer network and the recent funding support by promoters with further similar commitments also remain rating positives.

Nonetheless, the ratings are constrained by the likely pressure on Sarbottam’s near-term debt service indicators amid the shortened loan repayment tenure. The company plans to significantly lower the debt burden from the proposed initial public offer (IPO) proceeds (including sizeable share premium expected to be raised through book building IPO method). Hence, any unexpected timeline delays would remain critical as the operational cash flows might remain under pressure to serve the increased debt burden. Additionally, the evolving economic impact of the pandemic and the recent political turmoil has created challenges in the operating environment. The ratings are also constrained by the company’s high working capital intensity (NWC/OI2 of ~21% for H1 FY2021), despite the sharp improvement from ~48% in FY2019.

ICRA Nepal also takes note of the company’s increasing sales concentration with ~25% of the total cement sales and ~100% of the total clinker sales coming from the top 20 customers in the respective segments. The ratings are further impacted by the intense competition in the industry with many established players/brands as well as large upcoming  players in the field. Sarbottam’s margins are also exposed to the cyclicality inherent in the cement industry and the

volatility in interest rates, as seen in the recent years. Going forward, the company’s ability to successfully complete its IPO issue as planned, judiciously manage its working capital levels as well as maintain healthy sales growth and comfortable debt coverage indicators would remain the key rating sensitivities.

Credit strengths

Strong operational profile as one of the larger greenfield units with competitive input costs – The company operates a greenfield cement plant with the current installed clinkerisation capacity of ~1 million metric tonnes per annum (MTPA) and similar grinding capacity after the recently completed grinding capacity enhancement. With the enhanced capacity, Sarbottam Cement is among the large greenfield units in Nepal. Notably, its technology has enabled Sarbottam to lower limestone consumption for clinker production (in the range of 140–145% in the last few years). This, along with lower limestone transportation cost, has resulted in a relatively low raw material cost for clinker production (~NPR 4,400 per MT for FY2020). These advantages could help the company in maintaining a competitive position in the fragmented industry. 

Healthy sales volume growth despite Covid-19 crisis – Sarbottam was able to report healthy sales volume growth prior to Covid-19 at ~78% in 8M FY2020 compared to the 8M FY2019 levels. However, with the impact of the pandemicinduced lockdowns and disturbances in the last few months of FY2020, the overall volumetric sales increased only by ~23% in FY2020. The sales volume growth was mainly supported by the capacity enhancement in the clinkerisation unit from ~0.4 million MTPA to ~1 million MTPA in March 2019. Going forward, the company’s sales volume is expected to be boosted by the recently completed grinding capacity enhancement (in January 2021). Though the sales trajectory has remained good in H1 FY2021, despite the challenges in operating environment (~12% volumetric growth and ~3% sales growth compared to H1 FY2020 levels), its ability to maintain adequate realisation in clinker and cement will remain crucial. 

Healthy profitability indicators despite slight moderation –The company’s operating and net margins remained healthy at ~24% and ~12%, respectively in H1 FY2021. The slight decline in operating margins was mainly due to the decrease in sales realisation of both clinker and cement, amid increasing competition. Besides, the share of clinker sales, which have relatively lower margin than cement, has also increased in the recent period (~65% of total sales volume in FY2020 against ~57% in FY2019). Nevertheless, the reported margins were aided by control over production costs. Hence, volatility in

raw material prices also has a bearing on the company’s profitability. Improved financial profile – Sarbottam has gradually lowered its reliance on working capital debt, as is evident from its

utilisation of only ~51% of its drawing power as of mid-January 2021 (~89% as of mid-July 2020 and ~100% as of mid-July 2019). This has also increased the company’s financial flexibility. Further, the lower-than-anticipated usage of term loans in its capex has led to controlled capital structure with a gearing of 0.59 times as of mid-January 2021 (1.65 times as of mid-July 2019). Accordingly, the coverage ratios remained comfortable with interest coverage at 6.2 times and DSCR 1.8 times in H1 FY2021.

Experienced promoters/management; operational synergies as part of Saurabh Group – The company is a part of the Saurabh Group, which has a track record of more than 20 years in the cement industry, along with presence in other anufacturing and trading sectors. The Group’s long track record and the experienced promoters/management helps Sarbottam maintain a modest business performance, mainly through a wide sales/logistics network and business relationships developed over the years. The company derives a major chunk of its clinker sales (~48% for FY2020) from two grinding units related to the Group, namely Jagdamba Cement (rated LBB+/A4+) and Subha Shree Jagdamba Cement

(rated LBB+@3  A4+@), operating since 2001 and 2007, respectively in diverse locations. This provides assurance regarding clinker sales in the interim, until the demand for cement picks up.

Sarbottam Cement IPO Issue | IPO Issue of Sarbottam Cement | What is Book Building IPO Issue ?