More pain than gain
As the Street continues to speculate on Ultratech potentially acquiring the Gujarat-based cement assets of Jaiprakash Associates (JPA), we highlight that an aggressive acquisition price (coupled with already high capex commitments) will be a drag on Ultratech cash flows, which are already significantly inferior to peers, without Ultratech being able to significantly benefit from expanded capacities. We maintain our Sell rating with a target price of R1,600.
According to unconfirmed media reports, Ultratech is looking to acquire the cement assets of JPA for $700-890m, which will give it access to 4.8 mtpa of cement capacities in Gujarat. The acquisition will further strain Ultratech’s free cash flow (FCF) generation —its FCF generation has lagged peers due to ahead-of-industry capex plans (including meaningful maintenance capex).
Ultratech is looking to commission 10 mtpa of capacities by the end of FY2013. We highlight the precedent of the past three large capacity addition projects of the group, which (i) were delayed by two years from their original commissioning schedule (Kotputli & Tadipatri) and (ii) clocked suboptimal utilisation in the 12 months following commissioning of the plants.
Jaypee Cement Corp: still finding its feet: In April 2012 JPA demerged its cement capacities at three locations: Wanakbori, Gujarat (2.4 mtpa), Sewagram, Gujarat (2.4 mtpa) and Jaggayapeta, Andhra Pradesh (5 mtpa) and transferred them into a wholly owned subsidiary, Jaypee Cement Corp. (JCCL), for Rs40 bn.
In February 2011, JPA acquired 100% stake in JCCL, earlier known as Zawar Cement Private Ltd (ZCPL). ZCPL
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