UltraTech cementing a stronger future

Acquisition of Jaiprakash group's cement assets at attractive valuation will give the firm entry in new markets

UltraTech’s definitive agreement with Jaiprakash Associates (JPA) to buy the latter’s 21.2-million tonnes per annum (mtpa) cement capacities is positive for India’s largest cement producer. This is a slight change compared to the February memorandum of understanding (MoU) between the two companies, wherein UltraTech was to acquire 22.4 mtpa capacities. The new deal now leaves out JPA’s Karnataka-based 1.2-mtpa plant, which is in close proximity to UltraTech’s Malkhed plant and hence would have faced Competition Commission of India (CCI)’s hurdles. Analysts at Karvy Stock Broking say the CCI might now grant approval to the deal, considering UltraTech’s market shares across regions after consolidation.

Nevertheless, the enterprise value of Rs 16,370 crore ($115 per tonne) is attractive and lower than the $122 UltraTech had paid for JPA’s Gujarat-based assets.

The acquisition, which is likely to be completed in 12-15 months, will take UltraTech’s overall capacity close to 90 mtpa. Unlike earlier, the hurdles due to the Mines & Minerals (Development & Regulation) or MMDR Act, which had prevented transfer of limestone (used for making cement) reserves, has now been cleared after the amendment in the Act last month.

Operationally, though, UltraTech will have to do some legwork before benefits start accruing. Over 75 per cent of JPA’s capacity (to be acquired) is in North and Central India, including 11.4 mt in Satna cluster in Madhya Pradesh, 4.8 mt in Himachal Pradesh and 5 mt in South India. While a big chunk (17.2 mt) is operational and only 4 mt is under construction (to be completed by June 2017), capacities utilisation levels hover 50-60 per cent. Thus, earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne is close to Rs 580, way lower than UltraTech’s current Ebitda/tonne of Rs 900. Consequently, the deal is likely to be earnings dilutive for UltraTech in the first couple of years. However, given the size of the acquisition, integration benefits, UltraTech’s entry into new markets, etc, there are several long-term gains.

Meanwhile, in the past few quarters, the company has been reaping benefits of capacity additions in the form of decent volume growth even as demand was soft. Analysts say with demand expected to pick up in the second half of FY17, and realisations inching up already, UltraTech stands to gain. The stock, thereby, remains their top pick in the cement space. Those at Kotak Securities who might not be comfortable with UltraTech’s rich valuations, say the deal consolidates the industry and also helps increase UltraTech’s market share meaningfully in central and southern regions.