Dewan Cement: Whats with the market price?

This year has been a thriving one for the cement industry of the country, especially in terms of the price dynamics and companies margins. And what could be a better time for troubled companies like Dewan Cement to execute some key business decisions than that of positive industry dynamics. The local cement industry is abuzz with rumours that Dewan Cement Limited may be the target of an acquisition in the very near future. Though nothing official has been stated by Dewan or any interested buyer at the moment, certain facts about the company warrant attention. Dewan Cement, owned by the Dewan Group of companies, has not been performing up to mark over the past several years. The company has been operating under capacity at an average of 40 percent at both its northern and southern plants, at a time when the industrys average capacity utilization stands at about 70 percent. In addition, its also been a target of tremendous flak for its hefty leverage position, with its debt to equity ratio hovering around 170 percent compared to an average industry ratio of 109 percent at the end of 1HFY12. So much has been the pessimism surrounding the companys gearing position that financial institutions denied Dewan Cement loans to set up a line in the South in 2008. As a result, the company resorted to financing its expansion on its own, worsening its liquidity position further as its working capital was diverted to this financing. Even the auditors appear to be explicit in their disapproval of the companys finances, having presented only a qualified review for their accounts - a report issued when the auditor encounters non-compliance with generally accepted accounting principles. They have gone to the extent of claiming that the profit of Rs130 million reported in the companys Profit & Loss account for 1HFY12 should have actually been a loss of Rs427 million after taking into account adjustments for mark-ups on loans and correcting current liabilities that were quoted as long-term liabilities. Unsurprisingly, the company has proposed a restructuring deal to its lenders to help ease its burden and allow it to get back on track. The proposal includes the conversion of debt obligations into a term finance certificate of eight years, a three-year grace period, and the repayment of the principal in parts after the end of the grace period. However, given the companys aching financial and operational performance, analysts are not too optimistic about a deal working out. But besides the troubled company performance, the negative image attached with the Dewan Group could plausibly be holding the company back when it comes to clinching either new loans or restructuring arrangements with lenders. Here, any prospective acquisition of the company may become a critical turnaround for the company, since the mere backing of a reputable acquirer, even without any significant changes in operational dynamics, may be enough to convince lenders to look seriously into a workable debt restructuring arrangement. Of course, the scrip will be impacted in the local bourse as well. In fact, despite Dewan Cements tight-lipped stance on being questioned about the possibilities of an acquisition, share prices of Dewan cement shot up sharply recently, standing at over Rs6 per share, having risen by about 240 percent since what they stood at on 1st March (see graph). While this does hint that some critical news is rendering the market change its course as far as Dewan Cement is concerned, no confirmed news or names of potential acquirers have been dished out. Needless to say, given the scenarios presented, it is strongly probable that the companys valuation, both in terms of equity and debt, will be affected in case an acquisition materialises. Its not just numbers, but the acquirers goodwill also at play here.