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Acquisition value accretive for Ultratech

Ultratech Cement’s Rs 5,400 crore acquisition of Jaiprakash Associates’ cement plants in Madhya Pradesh, is regarded as value accretive by analysts. This acquisition is considered to be a much better deal than the acquisition of JPA’s Gujarat plant buy as the latest acquisition is a profitable asset. Not only do the two units have 4.9 MTPA cement grinding capacities but also 5.2 MTPA clinker capacities and a 180 MW captive power plant.

The excess clinker capacities will be utilized by company to increase the cement output from these units by another 18-2.5 MTPA. Thus the company post all planned expansions is likely to achieve the 75 MTPA mark in FY16. The Street gave a thumbs up to the acquisition pushing the stock by 3.39 per cent to Rs 2,625.

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

While the acquisition is being looked at value accretive by most brokerages, two brokerages have views to the contrary, Kotak Institutional Equities feel that the acquisition will likely be marginally earnings dilutive (3-4%) in the near term as has been the case with most acquisitions in the recent times. Similarly analysts at Ambit say that they find the acquisition expensive at $ 180/tonne (US$ 145 post expansion). This acquisition will not only increase leverage (to 0.5X) but also would be RoCE-dilutive for next 3-4 years, they believe.

Also while 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 CCI (competition commission) can lead to some delays in completion of acquisition feel some analysts.

Being a pan-India player 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 economy picks up. The cement volumes that had seen low single digit growth (3 per cent in FY13) is to grow by 6-7 percent in FY15 and which is further to accelerate to 7-8 per cent y-o-y in FY16/17 as prices are expected to are to rise at a run rate of 7-8 per cent annually.

This acquisition is one more in the long list of acquisitions leading to consolidation in the cement sector. The consolidation moves gathered pace a few years back when Holcim group announced planned merger of pan India player ACC with Ambuja Cement. Later Holcim and Lafarge also announced the planned merger globally. Thus combined ACC, Ambuja, Lafarge capacities post expansions are likely to touch 70 MTPA by FY16 end in India. In the backdrop Ultratech, with its planned expansions and acquisitions gains a slight edge.

For Jaiprakash Associates which has now sold capacities aggregating 13 mtpa over the past two years for an enterprise value of over Rs 10,000 crore ($ 135/ton) still retains ownership in 22 mtpa of cement capacity, including 5 mtpa in Andhra Pradesh and 2.2 mtpa in a JV with SAIL at Bhilai. Analysts feel that the Central India units were the most profitable ones as they catered to North and Western markets where realisations remain strongest. JPA’s total debt stood at Rs 22,193.21 on standalone basis at the end of Sep 2014 and will get reduced by almost 25 percent. However on consolidated basis it still remains much higher (Rs 74,725 crore at the end of FY14, a debt equity ratio of 5.16)


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