UltraTech cements a good deal :: Business Line

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UltraTech Cement has acquired JP Associates’ 4.8 million tonne cement capacity in Gujarat. Along with this comes a 57.5 MW captive power plant, limestone reserves for over 90 years at current capacity and a captive jetty at Sewagram.

The consideration for the deal at Rs 3,800 crore is to be settled by taking over debt of Rs 3,650 crore and by issue of Ultratech’s equity shares worth Rs 150 crore to JP Associates.

The deal consideration works out to an enterprise value of $125/tonne for the acquired cement capacity. With UltraTech Cement and the Holcim-controlled Ambuja Cements trading at $139-143/tonne now, the price paid looks fair.

This is because the Gujarat cement unit of JP Associates is less profitable due to a product mix skewed towards the lower margin non-trade segment.

CHANGING MIX

But with UltraTech’s takeover of the units, margins both at the operating and the net level should improve. One, UltraTech is looking to change the product mix and move a chunk of the despatch to the trade segment. This will improve the plant’s realisation. Two, UltraTech, thanks to its strong cash flows and balance sheet, may get a concession of 2.5-3 percentage points in the interest rate on the debt it has taken over.

After the takeover, UltraTech’s debt-to-equity ratio will increase marginally to 0.54 times.

The issue of around 8.8 lakh UltraTech shares at the current market price will result in an equity dilution of 0.32 per cent. But given that the acquired asset is currently loss-making, UltraTech’s earnings per share will be diluted by around 4-5 per cent – this is after assuming higher realisation at the plant, a lower interest rate and savings of Rs 35 crore on marketing synergies.

IMPROVING MARKET SHARE

Over the next two years as cement demand revives, capacity utilisation improves and prices inch up, the Gujarat plant should turn profitable and add to UltraTech’s earnings.

This acquisition will anyway help the company increase its market share in Gujarat and gain additional volumes from Mumbai, Mangalore, Kochi and Sri Lanka markets.

Currently, UltraTech’s three units in Gujarat have a total capacity of 7.6 million tonnes per annum and utilisation of around 90 per cent.