Due Diligence on a Southern Cement Target
The Prompt
Your client, a North-India cement major, has signed a non-binding term sheet to acquire a southern producer: 4 MTPA capacity across two plants, ₹1,900 crore revenue, running at 62% utilization in a region with chronic overcapacity. Commercial due diligence has surfaced four findings. The client asks: which findings reprice the deal, which kill it, and which are noise?
Structure & Hypothesis
Analysis & Data
Quantify the power and utilization items on the price.
Power: 4 MTPA at ~62% = 2.5 MT production; cement needs ~80 units/tonne, so ~200M units a year, 60% captive = 120M units × ₹1.8 = ~₹22 crore annual EBITDA hit from month 14 — wait, let me redo: 120M × 1.8 = ₹21.6 crore, call it ₹22 crore, growing with utilization. Capitalized at the deal's ~9× EBITDA multiple ≈ ₹190–200 crore off the price. Utilization: at 4.5% regional growth with no share gain, the model gets to ~70%, not 80% — that's roughly ₹55–60 crore less EBITDA in year 3 than management's case; capitalized, another ₹200+ crore of air in the ask. Though here the client's own thesis matters: their brand and distribution may legitimately drive share gain beyond market growth — that upside belongs to the buyer's plan, and we shouldn't pay the seller for it.
Corrects his own arithmetic mid-answer — far better than carrying an error forward. And the last point is the DD golden rule.
And if the limestone lease can't be conditioned?
Then structure around it: hold back 20–25% of consideration in escrow releasable on renewal/re-auction win, or price the deal on 7 years of cash flows plus an option — not 25 years of plant life. If the seller refuses both, walk; a cement plant without secured limestone is a stranded asset with a chimney.
Recommendation
Recommend
- Reprice from ₹3,400 crore to ~₹3,000 crore: −₹200 cr power adjustment, −₹200 cr utilization air; the entry then sits at ~$88/tonne, comfortably below replacement cost.
- Make limestone-lease security a condition precedent or a 25% escrow — this is the only finding that can kill the deal.
- Cover the cartel litigation with a specific indemnity + ₹90 crore escrow from seller proceeds; do not haggle it into the headline price.
- Underwrite share gain from the client's own distribution as buyer upside — explicitly excluded from what we pay the seller for.
Key Takeaway
What this case teaches
DD findings sort into four buckets: model it (quantifiable cost), contract it (bounded risk → indemnity/escrow), condition it (existential risk), ignore it (noise). And the golden rule of diligence pricing: never pay the seller for value only the buyer can create.