Brick by brick. That’s how Kumar Mangalam Birla builds businesses. Whether through additions or acquisitions, the AV Birla group chief continues to grow his conglomerate—from aluminium to telecom, Birla has always scouted for an asset or two. The $5.95 billion Novelis acquisition was made way back in 2007 while Idea Cellular picked up the telecom business of BK Modi’s Spice Communications in 2008 which gave it a presence in the states of Punjab and Karnataka. More recently, the group had added to its retail business, buying the fashion apparel and accessories retail chain Pantaloons from Kishore Biyani-led Future Group.
Last week Birla announced the acquisition of two integrated cement plants from the debt-laden Jaiprakash Associates for an enterprise value of R5,400 crore.
With that Ultratech Cement, the AV Birla Group’s cement outfit, adds a capacity of 4.9 million tonnes per annum (mtpa), taking the total to a commanding 65 mt. That’s about 5 mt more than rival Holcim’s 60.1 mt, across its two subsidiaries ACC and Ambuja.
The acquisition is strategic because the Bela and Sidhi units in Madhya Pradesh will complete Ultratech’s pan-India footprint—prior to this the firm was missing out on the Satna cluster which caters to regions like central and eastern Uttar Pradesh and Bihar. That’s probably why Birla didn’t mind paying a little more. Analysts say the price implies an EV (enterprise value)/tonne of $ 175, making the deal a tad richly valued in relation to recent transactions. However, they do qualify the comment to say the price should be seen in the context of the clinker capacity of 5.2 mtpa.
“Adjusting for the higher quantum of clinker capacity, the acquisition appears more reasonable at $125-140/ tonne,” Kotak Institutional Equities wrote in a report.
Indeed, OP Puranmalka, managing director and chief executive, Ultratech has said the company will consider setting up a greenfield cement grinding unit or acquire one in the region. Puranmalka has no doubt weighed the purchase against the replacement cost of setting up a greenfield cement plant of similar capacity pencilling in the fact that the Jaiprakash Associates’ cement plants also come with a captive power plant of 180 MW.
This is the second time that Ultratech has bought cement making assets from Jaiprakash Associates. In September 2013, Ultratech purchased two cement plants in Gujarat with a capacity of 4.8 mtpa from the Manoj Gaur-led Jaypee group (of which Jaiprakash Associates is a part) for an enterprise value of R3,800 crore or $123 per tonne. These buyouts will over the long term help Ultratech cement its position as the country’s top cement producer.
Puranmalka isn’t losing sleep over how to fund the transaction; Ultratech reported net profits of R2,050 crore in FY14 and is tipped to post profits of R2,240 crore in the current year. He also doesn’t anticipate any hurdles with respect to India’s competition laws while completing the transaction because the firm didn’t have a presence in the Satna cluster before this.
The acquisition, analysts point out, could be marginally earnings dilutive—3 to 4% in the near term even after factoring in an 80% utilisation level and profitability that is comparable to that of Ultratech.
Ultratech has been one of the most aggressive cement makers in India in terms of capacity creation over the last one decade (FY05-FY14), adding nearly 30 mt in this period. Its aggregate production capacity prior to this acquisition stood at 63.4 mt per year, including overseas capacity of 3.2 mt.
The firm, which has a strong balance sheet and steady operating cash flows, is currently in the midst of a massive R10,000 crore-capex plan through which it aims to further increase its cement capacity by 6 mtpa by fiscal 2016 end and invest in associated infrastructure and power plants.
As on September 30, Ultratech had consolidated net debt of R5,560 crore, including the debt associated with the cement plants acquired from the Jaypee Group in September.
For Jaypee Group, this would be the fourth such cement asset sale in little over a year. Jaypee Group is looking to sell assets, including cement and power plants, to pare the hefty debt burden on its books. The aggregate debt of the group stands at around R55,000 crore. The company has already divested assets worth R15,000 crore, but the impact of these asset sales is yet to reflect on the group’s balance sheet. It aims to cut down debt further by around R10,000 crore by end of this fiscal.