HSBC STG Bangalore

IB League 2019

PUBLIC
Section 1
Overview

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IB League 2019 - STG Campus Case Study
Overview

Background
In April 2019, the Rajan Raheja Group (RRG), a diversified conglomerate which holds controlling stake in Prism
Johnson Limited (PRJ or Company), decided to divest PRJ for a portfolio optimization.
The Board of PRJ had appointed investment bank “STG Advisers” to undertake a strategic review of the
business and advise on a potential sale of the company. Your 3 member team, acting as STG investment
bankers, prepared a presentation to the Board of Directors, incorporating the below:
 A sell side positioning story for the Company
 Preliminary valuation analysis to advise on a potential fair value of the Company
Subsequently and based on the briefing pack, the Board of PRJ put up the company on sale to interested
buyers in early May. On 15th May, the Company received a formal takeover offer from Baring Private Equity
Asia. On 25th May, the Company received another offer from ACC Limited. Both all-cash offers were
comparable, however the Board thought that there could still be potential upside to the offers.
A few other industry players also expressed interest in acquiring the Company in the early stages of the sale
process, but no formal offers were received from them as of 31st May. This has been attributed to the recent
round of consolidation that has happened in the industry.
Given the above developments, the Company has asked “STG Advisers” to provide its assessment to the Board
on the below:
 Which of the 2 bidders - one strategic and the other a financial sponsor - would be a more suitable
candidate for decisive final negotiations and a subsequent sale of PRJ?
As a sellside adviser, you could provide further analysis on transaction structuring alternatives (for example,
RRG holding a minority stake rather than a full exit) in the context of the preferred buyer. All suggested
scenarios should be backed by sound reasoning.

Guidelines for presentation

Please prepare a presentation of maximum 15 slides (excluding section dividers). A suggested outline is as
follows:

A Executive summary (1 slide)

 Overview of situation and summary of the proposal

B Sell side positioning (3-4 slides)

 Key investment highlights positioning PRJ for sale to potential acquirers

C Preliminary valuation analysis (5-8 slides)

 Business plan for PRJ, highlighting key items and underlying assumptions
 What is the potential fair value of PRJ? Use valuation methodologies such as comparable companies,
precedent transactions, discounted cash flow, leveraged buyout, and other methods (as applicable)
 Describe all qualitative and quantitative assumptions used in valuation of PRJ, e.g. justification of
trading comparables and precedent transactions selected for a valuation exercise
D Recommendation on a potential sale (1-2 slides)
 Considering the given set of buyers, what is the recommended course of action for the company?
Recommendation to be backed by necessary quantitative and qualitative analysis
E Appendices (in addition to the main book - maximum 5 slides)
 Industry overview illustrating key trends
 Target (PRJ) business profile
 Any supporting materials (e.g. related to valuation etc.)

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Section 2
Additional Information

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IB League 2019 - STG Campus Case Study

In addition to operational and financial information from websites, please go through the below content having
some additional information in the context of the sell side scenario and the bids offered:

Prism Johnson Limited

 Prism Johnson, promoted by Rajan Raheja Group, is an integrated multi-product building material company
with products such as cement, ready-mixed concrete, tiles, bath and kitchen products. The company has 3
divisions - Prism Cement, H & R Johnson (India), and RMC (India). PRJ also holds 51% stake in Raheja
QBE General Insurance Company which is a JV with QBE Insurance Group of Australia.

 PRJ is based in Central India, with units in Madhya Pradesh with a capacity of 7 MTPA of cement. RMC
operates 92 ready mixed concrete plants across India. RMC has a backward integration in aggregates
business and operates 5 quarries. HRJ has 13 manufacturing plants and is one of the few entities in India
offering end-to-end solutions of tiles, sanitaryware, bath fittings, engineered marble & quartz.

 The total insider stake in PRJ is c.70%. The promoter group (RRG) expects to sell its stake at an attractive
premium, at least c.30% to the volume weighted average share price (VWAP) of INR82.02 in Q1 CY2019.
The promoters are keen to have an exit that entails minimum management overhaul or employee
rationalization in the entity post acquisition (partly due to certain contractual constraints). RRG has also
adopted a strategic vision to have a periodic review on capital efficiency, and accordingly facilitate
divestitures and acquisitions of businesses as appropriate.

Baring Private Equity Asia

 Founded in Hong Kong in 1997, Baring PE Asia has a total committed capital of over USD17bn. It is an
Asia-focused sector agnostic PE firm. Currently, Baring Asia does not hold any investment in the building
materials sector in India and is keen to re-enter the Indian cement market given significant growth
opportunities.

 Back in May 2013, Baring had invested EUR200m (INR14.1bn then) for a 14% stake in Lafarge India
through fresh issue of securities. The deal was one of the rare instances where a multi-national firm
divested a minority stake in its India operations to a PE firm to fund its growth. Lafarge, one of the world’s
largest cement manufacturers, was at that time looking to cut its EUR 12.2bn debt, caused by acquiring the
Middle Eastern cement maker Orascom in 2007. Lafarge also assured a 15% IRR and buyback of the
shares of its Indian arm from Baring within 5 years.

 2 years later, in June 2015, Baring exited the investment, with Lafarge buying out Baring’s stake in Lafarge
India for EUR270m (INR19.5bn). For Baring, this was the biggest bet yet in India at that time and it sealed a
neat profit from the investment. In dollar terms it generated an 18% return (not counting dividends, if any)
over two years. This serves as a benchmark return for Baring’s future investments in the Indian building
materials industry.

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IB League 2019 - STG Campus Case Study

ACC Limited
 Founded in 1936, ACC is one of the largest players in the Indian cement industry. One of the few cement
companies to have a pan India presence, ACC`s main businesses comprise manufacturing and marketing
of cement, ready-mixed concrete, bulk cement and refractory products. It is controlled by global building
materials giant LafargeHolcim, that holds a 54.5% stake (through direct and indirect investments).

 Recent M&A activity involves sale of 12.13% stake in Shiva Cement to JSW Cement in March 2017. In June
2018, the press reported that Jaiprakash Associates, an Indian industrial conglomerate, was in advanced
talks with ACC, to sell its residual cement business for INR 52bn. However, ACC dismissed this news as
market speculation. There were also talks of a potential merger of ACC and Ambuja Cements in early 2018.
This was subsequently put on hold, as reported by media.

 In December 2018, ACC announced expansion plans of 6 MTPA, with investments in Madhya Pradesh,
Uttar Pradesh and Jharkhand. However, this is expected to be operational in Q3 2021. ACC has also
focused on various cost control measures. As per brokers, fixed-cost side rationalization is playing out well,
thanks to tight controls on SG&A spends and employee reductions done over the last 2 years. One of the
key focus areas of the management has been leverage, which is a key performance indicator (KPI) for
ACC. Currently, ACC has a net cash balance sheet and the company targets to maintain net debt / EBITDA
< 1x on a consistent basis. Brokers expect company to benefit from better demand momentum, price hikes,
new capex announcement providing a visibility on growth beyond 2021 and a net cash balance sheet.

Additional information for modeling assumptions

 Valuation of insurance business:

The Board of PRJ has decided to sell the company’s 51% stake in Raheja QBE General Insurance to RRG
just before the sale of the company for cash proceeds of INR1.35bn. Please note that the financial
estimates provided in the next page are adjusted for the stake divestment in insurance business

 For annual interest rate calculations, consider a base rate of 6% p.a. plus margin as indicated in the table

 Please also refer to the below guidelines:

Year ending leverage Base rate: 6% p.a.
 Assume transaction funding on EV basis (debt Leverage Grid
and cash free basis) (L: Debt / EBITDA) Margin
L < =2.5x 1.50%
 Maximum debt capacity for a leveraged buyout
scenario: 4.5x net debt / FY1 EBITDA 2.5x < L<= 3.0x 2.00%
3.0x < L< =3.5x 2.50%
 No mandatory schedule for annual debt 3.5x < L<= 4.0x 3.00%
repayment. However, debt must be paid down
in case there is excess cash (post operating, 4.0x < L< =4.5x 3.50%
investing and interest payment outflows) L > 4.5x 4.00%

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IB League 2019 - STG Campus Case Study
Financials estimates from brokers

Broker A

INR million 2020E 2021E

Revenues 65,277 70,333

EBITDA 7,465 8,398

EBIT 5,279 5,988

Interest Expense (2,064) (1,878)

Other income 444 474

Tax Expense (1,219) (1,548)

Capital Expenditures (3,500) (3,500)

Change in NWC 541 851

Broker B

INR million 2020E 2021E

Revenues 65,467 68,654

EBITDA 7,915 9,409

EBIT 5,801 6,919

Interest Expense (2,189) (2,189)

Other income 481 613

Tax Expense (1,406) (1,781)

Capital Expenditures (4,400) (4,400)

Change in NWC 1,251 (2,726)

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IB League 2019 - STG Campus Case Study
Financials estimates from brokers (cont’d)

Broker C

INR million 2020E 2021E

Revenues 63,675 68,500

EBITDA 7,066 7,992

EBIT 5,402 6,319

Interest Expense (2,125) (2,052)

Other income - -

Tax Expense (1,139) (1,475)

Capital Expenditures (1,602) (1,478)

Change in NWC 249 493

Broker D

INR million 2020E 2021E

Revenues 66,812 72,885

EBITDA 7,123 8,394

EBIT 5,099 6,282

Interest Expense (2,107) (1,966)

Other income - -

Tax Expense (940) (1,349)

Capital Expenditures (4,000) (2,029)

Change in NWC (301) 135

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Section 3
Precedent transactions and trading
comparables for relative valuation

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Selected precedent transactions
Asian cement sector
EV /
% EV Capacity EV/
Date Target Acquirer stake (USDm) (USD/t) EBITDA

9-May-19 Holcim Philippines San Miguel Corp 86% 2,148 215 16.2x

2-May-19 Lafarge Malaysia YTL Cement 51% 893 69 n/a

13-Nov-18 Holcim Indonesia Semen Indonesia 81% 1,817 121 14.2x

28-Feb-18 Binani Cement Dalmia Bharat 100% 959 153 n/a

22-Jan-18 Kalyanpur Cement Dalmia Bharat Ltd 100% 50 0 n/a

22-Jan-18 Halla Cement Co Asia Cement Co 100% 659 87 9.0x

17-Jul-17 Hyundai Cement Co. Ltd Hanil Cement Co. Ltd. 85% 600 75 10.9x
Vietnam Construction
7-Mar-17 Siam Cement Group 100% 419 135 n/a
Materials (JSC)
11-Jan-17 Shiva Cement Limited JSW Cement 32% 47 80 33.7x

6-Nov-16 OCL Dalmia Cement (Bharat) 26% 914 135 10.8x

6-Oct-16 Bhilai Jaypee Cement Orient Cement 74% 207 94 n/a

6-Oct-16 Jaiprakash Power Ventures Orient Cement 100% 71 36 n/a

Beijing Hexie Hengyuan
23-Aug-16 Sichuan Shuangma Cement Technology and other 32% 1,007 92 21.2x
investors
4-Aug-16 Lafarge Vietnam Siam City Cement 65% 842 134 11.2x

25-Jul-16 Holcim Lanka Siam City Cement 99% 385 167 11.2x

11-Jul-16 Lafarge India Nirma Group 100% 1,343 124 14.2x

17-Mar-16 Lafarge Halla Glenwood-Baring 100% 513 62 10.8x

Cemex Bangladesh and
10-Mar-16 Siam City Cement 100% 51 37 n/a
Thailand
28-Feb-16 Jaiprakash Assoc Ltd-Cement Ultratech 100% 2,361 114 12.3x

4-Feb-16 Reliance Cement Birla Corporation 100% 686 136 n/a

Ssangyong Cement Industry
22-Jan-16 Hahn & Company 46% 1,769 116 8.7x
Ltd
15-Jan-16 Dalmia Cement (Bharat) Ltd Dalmia Bharat Ltd 15% 2,167 87 n/a
Jaiprakash Associates
7-Jan-16 Shree Cements Ltd 74% 300 143 n/a
Cement - Bhillai plant
27-Nov-15 Baoji FHS West China Cement 100% 180 47 n/a

27-Nov-15 Baoji JLH West China Cement 100% 86 39 n/a

27-Nov-15 Qianxian Cement West China Cement 100% 162 73 n/a

27-Nov-15 Qianyang Cement West China Cement 100% 137 62 n/a

Tongchuan Yaowangshan
2-Nov-15 West China Cement 100% 113 52 n/a
Ecological Cement
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Notes: FX (USD1 = INR70)
Sources: Company filings, HSBC analysis
Selected precedent transactions (cont’d)
Asian cement sector
EV /
% EV Capacity EV /
Date Target Acquirer stake (USDm) (USD/t) EBITDA

30-Oct-15 Sichuan Shuangma Cement LafargeHolcim 25% 780 355 11.8x

17-Aug-15 Lafarge India assets Birla Corporation 100% 714 139 n/a
Lafarge Republic CRH & Aboitiz Equity
8-Jun-15 99% 1,154 177 9.2x
(Lafarge assets in Philippines) Ventures
29-Mar-15 Siam City Cement Jardine Cycle 25% 2,323 160 11.0x

1-Mar-15 Lafarge Shui-On Lafarge 45% 1,708 53 11.1x

Dalmia Cement (Bharat)
25-Feb-15 OCL India 27% 608 89 n/a
Ltd
23-Dec-14 Jaiprakash Assoc Ltd-Cement Ultratech 100% 771 157 11.0x
Dalmia Cement (Bharat)
1-Dec-14 Bokaro Jaypee Cement Ltd 26% 34 60 1.3x
Ltd
22-Sep-14 Asia Cement Co. Asia Holdings Co. 30% 279 0 16.2x
Lafarge Russia (JSC
16-Sep-14 Buzzi Unicem 100% 117 107 n/a
Uralcement)
25-Aug-14 Jaiprakash Assoc Ltd-Cement Shree Cements Ltd 100% 51 34 n/a

24-Jul-14 Lafarge Pakistan Bestway Holdings 76% 282 118 13.6x

4-Jul-14 Vicat Sagar Cement Pvt Ltd Vicat SA 47% 83 56 16.9x

Chettinad Cement
27-May-14 Anjani Portland Cement Ltd 62% 36 30 n/a
Corporation
Dalmia Cement (Bharat)
24-Mar-14 Bokaro Jaypee Cement Ltd 74% 164 101 8.6x
Ltd
JP Associates
11-Sep-13 Ultratech 100% 543 113 n/a
(Gujarat based unit)
My Home Industries
12-Aug-13 Sree Jayajyothi Cements 100% 200 0 n/a
(CRH)
23-May-13 Northern Cement Company San Miguel Corp 35% 163 142 n/a

30-Apr-13 Lafarge India Baring Asia 14% 1,450 173 n/a

Siam City Cement (Holcim Bangkok Broadcasting
21-Dec-12 9% 323 0 n/a
stake) and Television
20-Dec-12 Thang Long Cement Semen Gresik 70% 257 112 n/a

19-Dec-11 YTL Cement YTL Corporation 52% 386 73 2.7x

Set Group excluding Afyon
25-Feb-11 Limak Group 100% 273 0 n/a
Çimento (Italcementi)
30-Jul-09 Hanson/HC's Israel operations Mashav (Clal Industries) 100% 117 0 n/a

4-May-09 Lafarge Aslan and subsidiaries Oyak Cement Group 97% 159 47 10.3x

2-Apr-08 Set Group (Ciments Francais) Sibirsky Cement 100% 535 152 12.7x

15-Dec-06 Yibitas Lafarge Cimpor Cimentos 50% 447 128 10.1x

10-Aug-01 Mashav Group CRH 25% 392 69 5.3x

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Notes: FX (USD1 = INR70)
Sources: Company filings, HSBC analysis
Trading comparables
Asian cement sector

Market Enterprise EV /
Cap Value Capacity EV/Sales1 EV/EBITDA1 EV/EBIT1 P/E1
Company name USDm USDm (USD / t) FY'20E FY'21E FY'20E FY'21E FY'20E FY'21E FY'20E FY'21E
Indian Peers
ACC 4,325 3,894 117 1.8x 1.7x 13.5x 11.2x 19.0x 14.5x 20.6x 22.1x
Ambuja Cements 6,256 6,101 206 1.6x 1.5x 11.0x 9.1x 15.9x 12.6x 21.2x 24.3x
Birla Corporation 647 1,062 69 1.0x 1.0x 6.6x 5.9x 9.0x 8.0x 14.4x 10.8x
Century Textiles &
1,544 1,625 111 2.0x 2.9x 9.8x 14.0x 18.2x 17.1x 19.8x 26.4x
Industries
Heidelbergcement India 648 656 122 2.1x 2.0x 8.9x 7.7x 9.8x 8.3x 19.5x 16.9x
India Cements 441 869 56 1.0x 0.9x 7.7x 6.9x 11.3x 10.0x 50.1x 19.2x
J.K. Cement 1,042 1,296 173 1.6x 1.4x 9.0x 7.8x 11.7x 10.4x 14.6x 12.9x
JK Lakshmi Cement 615 806 97 1.5x 1.4x 11.6x 10.0x 18.6x 15.4x 56.7x 24.5x
Orient Cement 332 504 63 1.2x 1.1x 8.2x 7.0x 12.2x 10.1x 16.6x 11.3x
Ramco Cements 2,589 2,810 171 3.3x 2.8x 14.9x 12.5x 20.1x 16.3x 36.7x 27.8x
Sagar Cements 182 241 103 1.2x 1.0x 8.5x 6.4x 14.6x 9.1x 78.0x 18.2x
Sanghi Industries 223 307 75 1.7x 1.3x 9.9x 7.0x 14.4x 10.0x 15.0x 13.2x
Shree Cement 10,180 10,519 278 5.3x 4.6x 20.4x 17.2x 33.7x 26.1x 40.2x 30.8x
UltraTech Cement 18,239 21,182 220 3.3x 2.9x 16.9x 14.4x 22.6x 18.7x 35.6x 26.9x
Greater China Peers
Anhui Conch Cement 30,529 26,650 75 12.7x 13.1x 36.8x 38.0x 41.4x 42.3x 8.1x 8.1x
China Resources
6,066 6,379 77 11.5x 11.5x 34.1x 34.1x 40.7x 40.9x 5.9x 6.1x
Cement

Guangdong Tapai
1,932 1,539 140 15.9x 14.1x 41.0x 36.8x 48.2x 41.2x 7.6x 6.8x
Group
Asia Cement (China) 1,839 2,036 54 10.8x 11.2x 29.8x 24.3x 31.6x 28.8x 5.7x 4.9x
West China Cement 717 1,021 35 10.5x 11.3x 28.8x 23.8x 32.5x 34.8x 4.8x 4.5x
Taiwan Cement 6,930 9,031 111 5.0x 4.9x 17.8x 16.6x 22.0x 20.7x 9.8x 9.8x
Other Asian Peers
Taiheiyo Cement 3,709 6,236 938 0.5x 0.5x 3.6x 3.5x 6.0x 5.7x 9.1x 8.5x
Ssangyong Cement
2,407 2,964 258 0.1x 0.1x 0.5x 0.5x 0.8x 0.8x 18.5x 15.2x
Industrial

Sumitomo Osaka
1,541 1,993 159 0.5x 0.5x 3.9x 3.7x 8.2x 7.5x 13.4x 12.9x
Cement
Eagle Cement 1,520 1,392 196 5.6x 4.6x 14.3x 11.3x 16.1x 12.7x 16.5x 13.7x
Lafarge Malaysia 754 974 69 31.5x 29.0x (604.1x) 831.1x (224.7x) (543.0x) (11.3x) (25.5x)
Cahya Mata Sarawak 772 859 312 34.6x 32.7x NA NA 212.3x 187.1x 12.3x 12.3x
Cemex Holdings
256 584 102 1.7x 1.5x 13.5x 10.4x 25.2x 17.1x (28.5x) 14.2x
Philippines
PT Indocement
4,691 4,219 169 0.0x 0.0x 0.1x 0.1x 0.2x 0.1x 52.9x 36.5x
Tunggal Prakarsa
PT Semen Indonesia
4,417 6,382 120 0.0x 0.0x 0.1x 0.1x 0.1x 0.1x 21.8x 23.2x
(Persero)
Siam Cement 17,226 23,048 79 3.4x 3.4x 23.3x 21.1x 36.8x 32.4x 12.3x 12.0x
Siam City Cement 2,009 2,905 223 4.5x 4.3x 24.1x 22.8x 39.0x 35.3x 20.4x 17.7x

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Notes: Market data as on 21st May 2019
1. All financials calendarised to March
Sources: Factset, Broker Consensus, Company filings
Disclaimer

This Investment Banking Case Study Competition (“The IB League 2019”) is open for students
of 2020 batch only. The information in the case study is provided for illustrative purposes only
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