Cementing its place at the forefront of Brazilian Construction: Votorantim Cimentos

Brazil’s leading cement maker, Votorantim Cimentos, scrapped its planned IPO in June 2013. They planned to raise US$4.8 billion by listing on both the Brazil and New York stock exchange (in the form of American Depository Shares). The IPO would have offered units instead of shares, with each unit containing one common share and two preferred shares in order to maintain the founding family’s 93% ownership of common shares.

They have pulled out of the IPO citing difficult market conditions. This is true, at least in the short-term. The Brazilian economy is racked with stagnant growth, accelerating prices, and a slipping currency that makes investment dicier. Brazilian economic growth has slipped from 7.5% in 2010 to 0.9% in 2012, with 3% expected in2013. Meanwhile inflation has been creeping steadily upwards whilst the Brazilian Real/US Dollar exchange rate has been decreasing. A lower BRL/USD rate means the benchmark Selic interest rate unexpectedly shot up 50 basis points to 8%, whilst there is large exchange rate risk with one-third of Brazil’s debt in USD.

In the long-term, the Brazilian economy still has strong fundamentals. The Brazilian government has pledged US$700 billion to upgrade the country’s infrastructure and reduce their housing deficit. Meanwhile the 2014 World Cup and Olympics in 2016 also promises to stimulate the economy. More longer-term, Brazil still possesses abundant natural resources, an expanding middle-class, and low political risk. Moreover unemployment is at record lows of 4.9% and Brazil’s debt has been rated investment grade by Moody’s and Fitch since 2008. Therefore, we shouldn’t be too worried about the macroeconomic environment.

Votorantim Cimentos also has good long-term fundamentals. It is a subsidiary of Votorantim Participações, the country's largest industrial conglomerate, contributing 77% of group revenues in Q1 2013. It is also the leading Brazilian cement maker with 30% market share domestically. Globally, it ranks as the number eight cement producer with operations in South America, North America, China, India and North Africa. Its profit forecast also looks good in the next few years, as it has grown at an average of 18% since 2010 and hit BRL1.64 billion in 2012.

The combination of a strong Brazilian macroeconomic environment and a great company within a non-cyclical area would make for a good investment once they finally get around to listing their shares.