Ultratech Cement - Fair deal... - ICICIdirect

UltraTech Cement has finally closed the deal with the Jaypee group for acquisition of the 4.8 MT cement plant in Gujarat for Rs. 3,800 crore (i.e. Rs. 7,900/tonne). Post this deal, the company's capacity would increase to ~59 MT. The deal assumes Jaypee's debt of Rs. 3,650 crore to be taken on UltraTech's book and issuance of up to Rs. 150 crore via fresh issue of equity shares. This, in turn, would increase its net debt/equity to 0.26 from 0.03, which is still negligible. We believe this deal has been done at a fair valuation given current replacement costs, which are 18-20% higher. Apart from savings in capital and construction time period, the deal would give UltraTech a significant presence in the key western Indian markets as well as access to a jetty that would enable it to ship cement to new markets. Although it may lead to gross EPS dilution (without considering tax benefits) of ~3.5% in FY15E (assuming capacity utilisation of 85%, EBITDA/tonne of Rs. 850), there is clear scope for improvement in profitability through doubling the capacity of acquired plant given the land parcel and limestone reserve over the longer term.

Key highlights of deal:

- UltraTech will take over 4.8 MT of cement plant (recently commissioned) with latest technology from Jaypee Cement Corporation

- In return, the company would assume net debt of Rs. 3,650 crore from Jaypee's book and issue shares worth up to Rs. 150 crore. Hence, the total consideration works out to Rs. 3,800 crore


- Net debt/equity will increase to 0.26 from 0.03, which is still negligible apart from minimal equity dilution

Acquisition at right price; upgrade to BUY post recent correction

Apart from savings in capital and construction time period, the deal would give UltraTech Cement a significant presence in the key western Indian markets. Although it may lead to gross EPS dilution (without considering the tax benefits) of ~3.5% in FY15E (assuming capacity utilisation of 85%, EBITDA/tonne of Rs. 850), there is a clear scope for improvement in profitability through doubling of the capacity of the acquired plant given the land parcel and limestone reserve over the longer term. Hence, we maintain our target price of Rs. 2040/share (i.e. US$135/tonne on FY15E capacity) and upgrade our rating to BUY.

Source : Equity Bulls

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