After bagging Binani, UltraTech hopeful of increasing profits in N India

However, takeover will help cement firm to widen leadership gap in northern market

With Binani Cement under its belt, UltraTech’s leadership position in the northern markets will be strengthened. Consolidation in the industry will also be positive for cement pricing in the region. Moreover, the acquisition will enhance UltraTech’s capacity in the north to 24 million tonnes (mt), similar to that of Shree Cement. UltraTech’s capacity share, too, is expected to increase from 16 per cent to 24 per cent, say analysts. 

 At an enterprise value of Rs 79 billion, the transaction took place at an implied value of $100 per tonne of capacity (11 mt per annum or mtpa), according to analysts at Kotak Institutional Equities. Of the total capacity, 6.25 mtpa is in India, while the rest is overseas. 

The capacities in Rajasthan have good quality limestone reserves, and have the potential for further brownfield expansion. This acquisition will increase UltraTech’s India capacity to about 110 mt (including Century assets).

Further, about 2 mtpa capacity of Binani is in the UAE, and close to 3.0 mtpa in China. If UltraTech plans to dispose of these international assets, they can be monetised for Rs 15 billion (valuing the clinker asset at $60/mt and grinding assets at $40/mt), say analysts at Centrum Stock Broking. 

Binani was operating at low plant utilisation and profitability on account of liquidity issues. Binani’s Ebitda/tonne was less than Rs 200 in FY17, as compared to UltraTech’s Rs 930. 

UltraTech has a good track record in ramping up acquired capacities. Jaiprakash Associates capacities saw plant utilisation rise to over 70 per cent from 15-20 per cent, with improvement in operating profits a year after acquisition. 

Nevertheless, the acquisition may be earnings dilutive in the initial 1-2 years, according to analysts. The dilution is expected to be in the 3-6 per cent range initially, depending on plant utilisation and profitability improvement. 

UltraTech’s net debt will increase by Rs 80 billion on account of the Binani Cement acquisition, and by another Rs 30 billion because of amalgamation of Century’s cement assets. UltraTech’s net debt to equity will potentially rise 0.7-0.8 times in FY20, as against 0.5 times in FY18, say analysts at Centrum Broking.