UltraTech: Bigger size, brighter prospects

Deal with Jaypee is EPS accretive in long run; Budget's infra and rural push is a big positive

UltraTech Cement, India's largest cement producer, signed a memorandum of understanding (MOU) with Jaiprakash Associates (JPA) to buy the latter's cement assets. The Rs 16,500-crore deal valuation is attractive at an enterprise value per tonne of $110, lower than $122 it paid for the Gujarat-based assets and $170 for the five million tonnes per annum (mtpa) Madhya Pradesh-based assets of JPA.

If through, the acquisition will help UltraTech take a big leap in the domestic sector. UltraTech (current capacity, 63 mtpa) will be acquiring 18.4-mtpa capacity. In addition, it will spend Rs 470 crore on completion of capacity of four million tonnes. The acquisition will strengthen its hold in eastern Uttar Pradesh, Madhya Pradesh, Himachal Pradesh, and coastal Andhra Pradesh. Analysts say that about 50 per cent (11.4 mt) capacities are in Satna (Madhya Pradesh) where UltraTech does not have any market presence.

  Concerns are on clearance of acquisition by Competition Commission of India (CCI). Also, there are worries that initially the acquired plant will be operating at lower capacity use and, hence, can be earnings dilutive. Another obstacle would be Mines & Minerals (Development & Regulation) or MMDR Act, which prevents transfer of limestone (used for making cement) reserves, unless auctioned. Analysts say the CCI should clear the deal: Motilal Oswal says that state-wise combined entity's market share wouldn't cross 20-30 per cent, and share in the central region would be 30 per cent. But, for transfer of limestone assets, MMDR Act needs to change. Thus, early passage of revised Act will hold the key. UltraTech says it would take about a year for the deal to be completed.

Thus, FY18 is where the effect of the merger will be seen. Analysts at Prabhudas Lilladher say that assuming 70 per cent capacity use and Ebitda (earnings before interest, taxes, depreciation, and amortisation) per tonne of Rs 800 in acquired assets, the deal would be EPS (earnings per share) dilutive in FY18 due to low margins, which should improve in FY19.

The recent push to infrastructure and rural sectors is positive and should push demand and realisations for cement. While a clean energy cess of Rs 200 on coal is negative, UltraTech has been increasing pet-coke usage and should see lower impact on costs.

The stock gained 4.3 per cent on Tuesday to Rs 2,886. Most analysts remain bullish. Motilal Oswal has a target price of Rs 3,372 while Prabhudas Lilladher has Rs 3,000.