Gujarat Ambuja Cements Limited (GACL) is planning to issue securities in the international markets to mobilise upto US$ 200 m. The issue proceeds are to be utilised to fund the recent acquisitions by the company.
GACL is the largest manufacturer of cement in Gujarat and Punjab. It is India's most efficient cement manufacturer due to high degree of mechanisation in its products and mining activities. It has controlled freight costs by moving bulk of its production through the sea route.
The company has yet to decide whether to issue Global Depository Receipts (GDRs), American Depository Receipts (ADRs) or convertible debentures to raise the said amount. The company's acquisition of stakes in DLF Cements and Associated Cement Companies cost it Rs 3.5 bn and 4.55 bn respectively.
source Annual report
The move to raise equity will benefit the company in two significant ways. First, the funds raised could be utilised to repay a part of the debt. This would reduce debt-servicing costs that will spiral after the recent acquisitions. Second, the company's gearing would reduce (as equity component will increase) thus opening up the possibility of pursuing expansion and further buyouts in the future. Apart from this, a listing in the international markets will open a window for the company to mobilise funds in the future.
The issue of equity would lead to a dilution in the earnings, even as there is no fresh inflow of revenues in the company. This is mainly because of the fact that GACL has only bought stakes (cash outflow) in the two companies, implying that they will continue to remain, at least for some time, as independent entities. Thus, there would be a downward pressure on the return on equity (RoE), as profits decline (due to interest burden) and equity increases (post issue).
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