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| UltraTech Cement: Big is beautiful |
| Shobhana Subramanian / Mumbai Nov 17, 2009, 00:38 IST |
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The company should see higher valuations now that it’s a large cement play.
 Historically both Grasim and UltraTech have, more often than not, traded at a discount to their peers in the cement industry; ACC for instance has typically traded an EV/Ebitda (enterprise value to earnings before interest, tax and depreciation) of around 9 times whereas Grasim has traded at close to 6 times.
The merger of the cement business of Grasim (now housed in a subsidiary in Samruddhi) with UltraTech transforms Grasim into a holding company which might attract a discount, albeit not a large one since it will have a fairly large 60 per cent stake in India’s biggest cement company.
However, the merger should result in a re-rating for UltraTech, which would have a cement making capacity of close to 49 million tonnes per annum and a market capitalisation of around Rs 20,000 crore.
UltraTech, analysts estimate, should post net sales of close to Rs 16,250 crore and a net profit of Rs 2,200 crore in 2010-11. With concerns of the Aditya Birla group’s cement businesses being housed in different entities now no longer valid, UltraTech should command better valuations, closer to those of ACC and Ambuja Cements which currently command $120-$130 a tonne.
Meanwhile, even if the swap ratio announced for the merger of Samruddhi with UltraTech is not highly accretive for UltraTech shareholders, it will not be dilutive and at worst could be neutral say analysts.
Shareholders of Samruddhi will get four share of UltraTech for every seven shares held and if the ratio reflects a slightly higher valuation of $109 a tonne for Samruddhi compared with an implied valuation of $90 a tonne for Ultratech, industry watchers say it’s probably because Samruddhi is marginally more profitable than UltraTech and slightly bigger too.
The merger helps Ultratech as it will now have a pan-India presence, reducing its dependence on the southern markets. There isn’t much synergy expected post the merger since both Grasim and UltraTech were being run efficiently by a common sales and marketing team and much of the cement was being sold under the UltraTech brand.
The UltraTech stock, which has been underperforming the markets in recent weeks with investors unsure about the merger ratio, rose 1.5 per cent on Monday to close at Rs 740.
While the stock may not be expensive compared to peers, the general outlook on cement prices, which are expected to remain soft in the wake of excess supply, may keep the stock subdued.
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