UltraTech Cement -Strengthening footprint… :: ICICI Securities, link

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Strengthening footprint…
The board of UltraTech has approved the acquisition of cement assets of
Jaiprakash Associates in Madhya Pradesh (MP) at an EV of | 5400 crore.
The assets acquired include two integrated units with 5.2 MT clinker
capacity (2.1 MT at Bela + 3.1 MT at Sidhi) and 4.9 MT cement capacity
(2.6 MT at Bela + 2.3 MT at Sidhi) along with 180 MW captive thermal
power plants. Since the higher clinker capacity would entitle the company
to sell ~7.3 MT cement, this would enable the company to augment its
cement capacity by 2.4 MT with capex of ~| 500 crore. Considering these
benefits, we believe the consideration, to be paid by the company, looks
attractive (i.e. an EV of $135/tonne vs. current replacement cost of
$150/tonne). Further, this acquisition reinforces the company’s focus on
the Indian market. Hence, we continue to remain positive on the company
and maintain our BUY recommendation on the stock.
Maintaining leadership position in industry
Post this deal, the total capacity of UltraTech Cement would increase from
~60 MT to 65 MT. Further, with the expansion projects under execution,
the total capacity is set to increase 18% to ~71 MT (consolidated capacity
at 74.5 MT) by FY16E while the industry capacity is expected to grow at a
CAGR of 5% over the next three years. This, in turn, would help the
company to further gain its leadership position, going forward.
Low D/E provides ample leverage opportunities in future
After the acquisition, UltraTech’s net debt to equity is expected to
increase from 0.3x to 0.4x. The company currently generates operating
cash flows of ~| 4200 crore every year that can be leveraged further to
acquire assets in future.
Warrants premium valuations to capture long term potential!
We believe UltraTech is well positioned to reap the benefit of a recovery
in demand and generate healthy free cash flows in future with a strong
management. The stock is currently trading at 13.7x and 11.3x EV/EBITDA
for FY16E and FY17E, respectively, vs. last four year’s average valuations
of 13.0x. We raise our earnings multiple to capture the long term benefit
of this deal. We value the stock at 13.5x its FY17E, thereby arriving at a
target price of | 3240 with a BUY recommendation on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_UltraTechCement_QC_Dec14.pdf