UltraTech Cement - Acquisition of JPA’s MP Assets: Long-Term Positive ::Edelweiss report link

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UltraTech Cement (UTCL) is set to acquire 2 integrated cement plants of Jaiprakash Associates (JPA) based in Madhya Pradesh (MP), subject to due diligence and regulatory approvals. Total installed clinker and cement capacity of 5.2mtpa and 4.9mtpa, respectively, along with 180MW CPP is proposed to be acquired at an enterprise value (EV) of INR54bn. On current cement capacity, the EV/t works out to USD178. However, adjusting the deal value for surplus clinker capacity (which can aid ~2.1mtpa further expansion in cement) and ~75MW surplus CPP (which can be used for sale on merchant basis), the EV/t works out to a lucrative USD128. While the acquisition can be EPS dilutive (~7% for FY16E in our view) in the near term, we are certainly positive on it in the long run given the plants’ location in the deficit central region (where no capacity addition is expected in coming 2-3 years), scope to expand capacity and existing infrastructure support like railway siding and CPP.

Adjusted EV/t of USD128: Lucrative proposition

As part of the deal, UTCL has agreed to buy: (a) 2.1mtpa clinker and 2.6mtpa cement capacities at Bela, MP; (b) 3.1mtpa clinker and 2.3mtpa cement capacities at Sidhi, MP; and (c) 180MW CPP with 25MW at Bela and the balance 155MW at Sidhi. On current capacity, the EV/t works out to USD178; however, adjusting it for the potential capacity expansion and surplus CPP, the value works out to a lucrative USD128/t (refer table 1) versus the current replacement cost of USD120/t. The deal will further strengthen the company’s presence in central India with capacity share rising from 11% to 21%.

LINK

https://www.edelweiss.in/research/UltraTech-Cement--Acquisition-of-JPA%E2%80%99s-MP-Assets-Long-Term-Positive;-Company-Update/27904.html