Due Diligence on a Southern Cement Target
Three weeks of DD found four red flags. Which ones kill the deal?
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?
The four findings
Limestone reserves
The primary quarry's mining lease expires in 7 years; renewal is "expected" but the state has lately auctioned rather than renewed leases.
Utilization claim
Management's deck claims a path from 62% to 80% utilization in 3 years on regional demand growth of 7–8%; industry analysts forecast 4–5%.
Power contract
A below-market captive power agreement supplying 60% of plant power expires in 14 months; market tariffs are ~₹1.8/unit higher.
Pending litigation
A ₹90 crore competition-commission matter from a 2019 regional price cartel investigation, provisioned at ₹15 crore.
Before triaging: what's the deal logic — is the client buying the capacity to enter the South, or buying current cash flows? The same finding can be fatal to one logic and tolerable to the other.
DD findings only mean something relative to the deal thesis. State the thesis first; triage second.
Capacity-entry logic: the client wants a southern footprint it can feed with its own brand and distribution strength. Price on the table: ₹3,400 crore — about $100/tonne of capacity, versus $110–130 replacement cost.
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.