UltraTech Cement will likely acquire Jaiprakash Associates’s (JAL) 2.2 million tonne per annum (mtpa) cement units in Bhilai, Chhattisgarh, in a deal valued at close to R2,000 crore, two people with direct knowledge of the matter told FE. The acquisition will help India’s largest cement producer by volume fortify its position in eastern India. A spokesperson for the Aditya Birla Group said the company did not comment on speculation.
The Mumbai-based UltraTech is expected to pay around $135-145 per tonne, valuing the transaction at an enterprise value of R1,900-2050 crore that includes Jaypee’s R558-crore debt. However, the exact contours of the deal were not immediately available as deliberations are still in progress. This will be UltraTech’s third round of asset purchase from the debt-laden Jaypee Group, giving it a greater pan-India presence.
In December 2014, UltraTech acquired Jaypee Group’s two cement units with related clinker and power units in Madhya Pradesh for an enterprise value of R5,400 crore. A year ago in September, UltraTech had acquired two more of the groups’ cement units based in Gujarat worth R3,800 crore. Organic and potential brownfield acquisitions, including the Bhilai units, will increase UltraTech’s consolidated capacity to an estimated 77 mtpa-plus by end of the current fiscal year. Jaypee Group did not respond to emails send by FE.
Analysts with whom FE spoke to said the deal makes “good sense” for UltraTech Cement as it gives it synergies in regions that are more consolidated compared with the northern and southern parts of India. “Markets will take this positively because it drives consolidation in the premium markets of central and east India since a major price distorter like Jaypee is vacating the space. The eastern region of India is becoming a darling of cement companies,” said an analyst with a leading Mumbai-based financial services firm, who did not want to be identified.
The UltraTech Cement scrip advanced 2.16% or R64.05 to end at R3,033.60 on the BSE on Wednesday. The JAL stock remained flat at R18.45.
UltraTech Cement, a subsidiary of Grasim, with a total capacity of around 62 mt is also the largest exporter of cement and clinker from India. An official from an investment bank said that with the challenges surrounding land acquisition and regulatory clearances slowing the launch of greenfield projects, large business houses with deep pockets are looking to pick stressed assets at lower valuations. “Highly leveraged and stressed companies like the Jaypee Group and Lanco Infratech have recently had to offload some of their prized assets to reduce debt. This is benefiting the larger conglomerates to pick up plum deals. These prized assets are the easiest to offload and in troubled times debt-ridden companies do not have much of a choice but to sell these assets,” the official said.
Analysts say that cement prices have been under pressure over the past few months but given the infrastructure projects and higher government expenditure on the horizon and chances of lower interest rates boosting residential construction, the outlook for cement demand looks promising.
A Kotak Institutional Securities report notes that in FY 15, the Ebitda/tonne for UltraTech remained largely unchanged at Rs 873 as the benefits of higher realisation (+Rs 210/tonne, 4% year-on-year) were absorbed by an equivalent increase in cost of production (+Rs 209/tonne, 5% y-o-y).
For the financial year ended March 31, 2015, UltraTech reported a 4.88% drop in net profit at Rs 2,098.34 crore. The company’s turnover grew 12.45% to Rs 24,348.96 crore. The volume growth of 8% y-o-y is largely attributable to the acquisition of the JAL assets in Gujarat (4.8 mtpa), the Kotak report noted.
JAL, which had a massive net debt of Rs 27,267.9 crore at the end of FY14, has also offloaded two hydropower plants to JSW Energy for Rs 9,700 crore. The JSW deal followed the collapse of talks with Abu Dhabi National Energy in July 2014 and with Reliance Power in September 2014.