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The north and central India-centric cement maker, Birla Corporation’s move to acquire Lafarge’s units will extend its footprint in east India. Not only the region is lucrative for companies but it is a better option compared to expanding in south, already having excess capacities. Peers as ACC, Shree Cement, Ambuja Cements and JK Lakshmi are also adding/have added capacities in the region, the new capacities can be absorbed without much pressure on pricing. Analysts at Karvy Stock Broking remain positive on pricing in the eastern region in-spite-of capacity additions.
Thus, Birla Corp’s diversification of geographical presence by acquiring Lafarge’s Jojobera (Jharkhand) and Sonadih (Chhattisgarh) cement plants will also push up its capacities by 5.1 million tonnes (mt) to 15.1 mt at a go. Notably, the company will also get mining rights over limestone reserves associated with the acquired plants.
More important, the Lafarge capacities in question are very profitable, generating an estimated Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne of Rs 1,300. Hence, while adding to profits, it will also be earnings per share (EPS) accretive from the start. According to Karvy analysts, the return on capital employed (RoCE) works out to 13-15 per cent, which is positive for any company from the first year (on acquisition) itself as against new plant commissioning. New plants typically take two-three years to reach such RoCE levels. Interestingly, Birla Corp’s RoCE stood at just 5.33 per cent in FY15. Thus, expect the same to also get a boost from the deal.
The challenge, however, will be completing the acquisition looking at the dispute between Birla’s and Lodha’s over ownership of Birla Corp. Post the deal announcement on Monday, though the stock scaled to its 52-week intra-day high of Rs 614.85, it has cooled down to Rs 522.
