CHENNAI, December 25: Despite the denial by India Cements Ltd (ICL) that it is not mounting a bid for Raasi Cements (though not officially) and that the recent purchases made by it were to average its cost of holdings, the market does not seem to be convinced.

On Wednesday, the market was again agog with reports that India Cements Ltd (ICL) was close to making an open offer to acquire Raasi Cements. It reportedly resumed mopping up Raasi Cements shares and the volume in the scrip both in NSE and BSE amounted to 1.30 lakh shares.

The agressiveness shown by it in its recent capacity additions and the excellent valuations at which Raasi Cements is available are said to be the causes for the reluctance of the market.

ICL had pipped Gujarat Ambuja Cements to acquire Cement Corporation's 0.4 million tonne Yarraguntla plant and the 0.9 million tonne Visaka Cement Industries. The capacity of the company in a short span of less than a year is set to go up by 2.2 million tonnes to five million tonnes.

At the current price levels (Rs 92.50, up from Rs 55 levels) the total market capitalisation of Raasi Cements is only Rs 151.59 crore. Moreover, by acquiring Raasi, ICL also gets 30 per cent stake in Sri Vishnu Cement (if the management continues that investment in Raasi's books) which could effectively increase its capacity by three million tonnes. Compare this with the cost of setting up a three million tonne plant which industry sources say will cost Rs 1050 crore.

Valuation apart, takeover of Raasi would mean additional capacity without further distorting the demand-supply scenario in the South. It is this factor that has pegged the price of cement at a comfortable level compared to the West and North. But of late, the price difference between the regions is narrowing reflecting higher supplies. Andhra Pradhesh already has a surplus capacity of close to six million tonnes and a fresh three million tonne capacity would mean chaos. Realisations will fall thereby delaying the pay back period on the investment.

ICL would not only get an established brand, but also a well-set distribution network and a capacity that is in production from the day one.

But taking over of Raasi will be no cake walk for ICL. It already has its hands full. The Visaka Cement plant is slated to commence production in June 1998 and the sick Yarraguntla plant has to be nurtured back to health. Both these projects are funded by debt and ICL cannot afford to turn its focus elsewhere.

The Raasi management, definitely shaken, has struck a tough posture and has even gone to the extent of invoking the `Andhra spirit'. If the shareholding pattern revealed by the Raasi management is to be believed, ICL will not be in a position to acquire Raasi without entering into some sort of negotiated settlement with one or more promoters. The financial institutions with a stake of 25 per cent will play a crucial role. Any negotiated settlement would mean a price much higher than the current market price. It would be difficult to arrive at the quantum of funds that may be required for the takeover. Analysts `guesstimate' a price of Rs 250 to Rs 300 per share of Raasi Cements (almost three times its current market price) which would translate into a total cost of Rs 215 crore. Funding will be the crucial issue. ICL is expected to have a debt equity ratio of about 1.4 by March '98 and may not find it easy to borrow further substantially.

Even if it does, servicing would become difficult. The ICL scrip has not reacted to all the ruckus over the possible Raasi takeover and has stayed put at Rs 60 levels. Under current valuations takeover of Raasi Cements by ICL looks most attractive, theoretically. If ICL is contemplating a raid, whether it will be successful only time will tell.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.