Acquisition value accretive for Ultratech

With capacities getting a boost and the deal with Jaiprakash at an attractive price, analysts upgrade target prices

UltraTech Cement’s Rs 5,400-crore acquisition of Jaiprakash Associates’ cement units in Madhya Pradesh is regarded as value-accretive by analysts. This acquisition is considered a much better deal than that of JPA’s Gujarat plant, as the former is a profitable asset.

Not only do the two units together have a 4.9 million tonne per annum (mtpa) grinding capacity but also 5.2 mtpa clinker capacity and a 180 Mw captive power plant. The excess clinker capacity will be utilised to raise the output from these units by another 1.8-2.5 mtpa. Thus, the company is likely to, after all the planned expansion, likely to achieve the 75 mtpa mark in FY16. The Street gave a thumbs-up to the acquisition, pushing the stock up by 3.4 per cent to Rs 2,625.

Analysts feel the valuations of the acquisition (replacement costs of about $140 a tonne) are attractive, with UltraTech trading at replacement costs of about $190 a tonne. Giriraj Daga at Nirmal Bang Institutional Equities feels the deal is positive for the stock and value-accretive. Analysts at ICICI securities say this acquisition will allay concerns over UltraTech’s capital allocation and reinforce the company’s focus on the Indian market. Deutsche Bank is said to have upgraded its target price for UltraTech from the earlier Rs 2,950 to Rs 3,050. Daga maintains his target price of Rs 3,081, whereas ICICI has one of Rs 2,935.

Two brokerages aren't enthused. Kotak Institutional Equities feels the acquisition might be marginally earnings-dilutive (three to four per cent in the near term, as has been the case with most acquisitions in recent times. Similarly, analysts at Ambit say they find the acquisition expensive at $180/tonne ($145 after the expansion). This acquisition will not only increase leverage (0.5 times) but dilute the return on capital employed for the next three to four years, they believe.

Also, while the deal is to be completed in six months, the transaction is subject to customary due-diligence, definitive agreements, and regulatory approvals as may be required. Thus, any delay in approvals, especially from the Competition Commission, can lead to delays in the acquisition.

Being a pan-India entity, with adequate capacities in central India (almost 10 mtpa), too, UltraTech is gearing up to take full advantage of the upsurge in cement demand and realisations as the economy picks up. Cement volumes grew only three per cent in 2012-13 but should be growing by six to seven per cent in 2014-15. And, by seven to eight per cent over the year in FY16/17, as prices are expected to rise annually at the latter rate.

This acquisition is one more in a long list. leading to consolidation in the sector. These gathered pace a few years earlier, when the Holcim group announced a planned merger of pan-India company ACC with Ambuja Cement. Later, Holcim and Lafarge announced a global merger. The combined ACC, Ambuja and Lafarge capacities after expansion are likely to touch 70 mtpa by the end of FY16 in India. In the backdrop, UltraTech, with its planned expansions and acquisitions, gains a slight edge.

Jaiprakash Associates has now sold capacities aggregating 13 mtpa over the past two years, for an enterprise value of about Rs 10,000 crore ($135/tonne). It still retains ownership in 22 mtpa of capacity, including five mtpa in Andhra and 2.2 mtpa in a joint venture with Steel Authority of India at Bhilai. Analysts feel the central India units were the most profitable ones, as they catered to the north and western markets, where realisations remain strongest. JPA’s total debt was Rs 22,193 crore on a standalone basis at the end of September and will get reduced by almost 25 per cent. However, on a consolidated basis, it still remains much higher (Rs 74,725 crore at the end of FY14, a debt to equity ratio of 5.16).