In a bid to expand its geographical presence as well as gain scale, Orient Cement has announced its intent to acquire 4.2 mtpa of cement capacities, including a clinker capacity of 1.1 mtpa from Jaiprakash Associates for an enterprise value of R19.5 billion. The transaction comprises (1) acquiring the 74% ownership of Jaiprakash Associates in Bhilai Jaypee Cement Corporation housing a grinding unit of 2.2 mtpa and a 1.1 mtpa clinker unit at Bhilai/Babupur, Madhya Pradesh for a consideration of R14.5 billion ($ 99/tonne), and (2) acquiring a 2 mtpa grinding unit in Nigrie, Madhya Pradesh under Jaiprakash Power Ventures for an enterprise value of R5 billion ($ 38/tonne). Orient will likely fund its share of investment through a mix of debt, internal accruals and fresh equity raise.
Orient Cement has done well to expand its capacities to 8 mtpa (from 5 mtpa) in FY2016 with contained production costs. The funding of another R17.3 billion (adjusted for SAIL) of assets would require capital infusion that would be a combination of debt and equity over and above extant net debt of R12.5 billion; we take comfort from the improved pricing trajectory in Maharashtra and Andhra Pradesh. We lower rating to add (from buy) with a revised target price of R230/share (from R175/share) based on 8X EV/EBITDA on September 2018E earnings (from 7X on March 2018E) taking into consideration a lowered cost of capital.