BackUltraTech Cement’s Jaypee acquisition: a plum deal
The timing for a deal could not have been better given that the cement sector has bottomed out
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In spite of broader equity market indices falling a bit, UltraTech Cement Ltd’s shares had surged 3.39% on BSE on Wednesday. Not without reason. Its intent to acquire two cement units of Jaiprakash Associates Ltd, along with the related clinker and power units for ₹ 5,400 crore fired the stock.
UltraTech Cement had underperformed the S&P BSE Sensex, along with other cement stocks, on weak cement prices. Now, the acquisition will give it greater muscle as a pan-India operator. Post-acquisition and along with its recent expansion, UltraTech Cement’s capacity will be India’s largest at 71 million tonnes per annum.
Importantly, the two units are a strategic fit into UltraTech Cement’s present capacities. The company, which has nearly 60% of its capacity present in the south and west, has a lower presence in the central and eastern regions. With this acquisition, its exposure to these two lucrative markets will vastly improve. According to Emkay Global Financial Services Ltd, “the deal at US$135/tonne is slightly lower than the current replacement cost of US$150/tonne but is justified given the power and clinker units and the company’s ability to ramp up capacity at a time when the economic outlook is getting better for cement companies."
True, cement prices have been sliding for the last few months. But, given the infrastructure projects (especially roads) that are on the anvil and chances of a lower interest rate that may spur residential construction, demand for cement and prices are expected to look up in the coming months.
Analysts say that this deal may be slightly more expensive than UltraTech Cement’s earlier acquisition of Jaiprakash Associates’ Gujarat unit, which was done almost a year back. Of course, the economic outlook was gloomier then.
While the company is yet to spell out its funding plans for the acquisition, analysts reckon that a mix of debt and internal accruals is appropriate. Yet, it is unlikely to strain UltraTech Cement’s balance sheet. The current net debt-equity ratio of around 0.2 may inch up marginally over the next two years. Besides, it has a cushion of about ₹ 3,700 crore of investments, along with some cash and bank balance.
Meanwhile, the deal would provide relief to debt-ridden Jaiprakash Associates. The only concern for Jaiprakash Associates is that it would lose premium assets, although it would still be the third largest cement manufacturer in the country. Recall that earlier in the year, the Jaypee Group’s sale of hydropower assets fell through. The Jaypee Group’s consistent efforts to trim debt evoked a positive response on the Street—the stock of its flagship Jaiprakash Associates was up 9% on Wednesday.
From UltraTech Cement’s perspective, it’s a plum deal. The timing could not have been better given that the cement sector has bottomed out.
The writer does not have any positions in the companies mentioned here.
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