UltraTech Cement: Street watchful on valuations of new acquisition

Post consolidation of Century and Binani Cement assets, new acquisitions at stretched valuations may not bode well, say analysts

UltraTech Cement is in the news for being the frontrunner in the race for acquiring Emami group’s cement assets. The 8 million tonne (MT) of Emami’s cement capacities bode well for UltraTech, India’s largest cement maker, and would help the company strengthen its presence and market share in the eastern region. The move is in line with UltraTech’s pursuit of inorganic growth opportunities. Over the past few years it has acquired Jaiprakash Associates’ cement assets in Madhya Pradesh and Gujarat followed by Binani Cement’s assets in Rajasthan; the latest was the amalgamation and turning around of Century Textiles’ cement assets. As a result, UltraTech’s cement manufacturing capacity now stands augmented to 117.4 MT per annum, including its overseas capacity. The acquisitions at reasonable price and their timely turn-around have continued driving the company’s volume growth and market share and are the reason for keeping analysts positive on the stock despite the soft cement demand in the country at present.

In this context, news reports suggesting that UltraTech is leading the race for Emami group’s cement assets in an all-cash deal worth Rs 6,500-7,000 crore prima facie looks positive. This translates into an estimated valuation of $115-120 per tonne, for the 8 MT capacity, which is justified, say analysts. However, analysts also add that looking at clinker capacity at 3.2 MT, how much of cement capacity is operational will play an important role in deciding the actual valuations. The final deal valuations should not exceed the estimated value, which is currently being assumed by the market, they say. The acquisition otherwise bodes well given UltraTech has been witnessing capacity constraints in eastern India and the deal will only strengthen its position in the region. Recently, UltraTech had also announced setting up of new capacities of about 3.6 MT in the eastern region with a capex of Rs 940 crore.

Analysts such as Binod Modi at Reliance Securities say that in line with the company’s earlier guidance of not acquiring any assets aggressively (after Century and Binani Assets acquisition) and focusing on improvement of return ratios, in case it goes for an aggressive buyout, may not bode well for the stock. For now, Modi maintains a buy rating on the stock with a target price of Rs 5,000.