In a win-win deal, Aditya Birla Group company UltraTech Cement on Tuesday announced acquisition of Jaiprakash Associates' two cement units and associated power plants in Madhya Pradesh for Rs 5,400 crore.
The two units in Madhya Pradesh include clinker capacity of 2.1 million tonne and cement grinding capacity of 2.6 MT at Bela along with a captive power plant of 25 MW. In addition, 3.1 MT of clinker capacity and 2.3 MT of cement grinding capacity at Sidhi will also be sold along with a 155 MW power plant.
In a statement to stock exchanges, the company said, "This acquisition will create significant synergies and the surplus clinker will enable UltraTech to augment its cement capacity by a further 1.8- 2.5Mta in addition to the 4.9Mta mentioned above. This acquisition will enable the company to increase its presence in the Satna cluster of Madhya Pradesh.”
Post this sale, JP Associates, the flagship company of the group will retain the position of the third-largest cement maker in the country by paring its debt considerably.
Meanwhile, the sale of two units in Madhya Pradesh is its second deal with the Aditya Birla group-promoted company.
How experts view the deal:
Given that the valuations of the deal are quite reasonable, Piyush Jain of Morningstar sees it as a huge positive for UltraTech. Going ahead, he anticipates more acquisitions for the company, as the stock is already building in various acquisitions, domestic and foreign.
According to Mangesh Bhadang of Quant Capital, the assets sold by JP are cash-providing assets of the company, which seems like family selling its silver. However, in an interview to CNBC-TV18, he expresses concerns over company having very low assets once the deal is through.
Below is the verbatim transcript of Piyush Jain and Mangesh Bhadang’s interview:
Surabhi: Second major asset of the JP group that has been acquired by UltraTech . Let's get your sense on the valuations first, have they paid the right price?
Jain: I think the deal has been done at reasonable valuations. It is a group of two assets, one is thermal power and if I look at recent deals done by Adani and if we value at somewhere around Rs 7 crore per megawatt, I think the cement plants valuation comes somewhere in the region of USD 135-140 enterprise value per tonne, which with respect to any new Greenfield plant setup it is very reasonable valuation. So, 4.9 million tonne capacity addition done at very reasonable valuation. I think the deal is good for UltraTech .
Kritika: The value for this surplus clinker is a bit of a question. It seems to be roughly at -around Rs 750-800 crore. Based on our analysis the surplus clinker that is available is around 1.5-1.7 million tonnes per annum. What is the math that you make of it and what is the enterprise value of the surplus that will be available for UltraTech?
Bhadang: Surplus is in the sense that they don’t have grinding as of now. They have a total of 5.2 million tonnes of clinker. So, they can easily add upto 2 million tonne of grinding for it and putting up a grinding cement plant is easier with a lower cost. So, if I assume they put up a 2.5 million tonne grinding plant at say USD 60 per metric tonne the overall acquisition cost will come to around 140. These are very good assets because in eastern side of MP which is on the border of UP UltraTech does not have a significant presence and these are well established assets with good market share. So, they will be able to garner that market share with these acquisitions.
Kritika: If I just club both the deals JP has pretty much sold around 9 million tonne in terms of capacity. Going forward what does this leave JP with? Debt comes down but they have pretty much sold their family silver?
Bhadang: Exactly. These were one of the marquee assets in the JPA cement fold. Given the kind of asset sale that these are doing, most of the assets that are getting sold right now are the ones which are providing cash flows to the company. I would not say that for the Gujarat cement plant but definitely MP as well as UP cement plants are definitely providing cash flows to them. So, selling them as you rightly said they are selling family silver. However, the kind of leverage that they have on their head this will clear at least 10 percent of their leverage and hopefully the banks would be looking at that as a positive aspect. Obviously, at the end of it probably JPA will end up having very low assets.
Surabhi: How should investors read this development from a market standpoint? How would you expect the UltraTech stock to react to this?
Jain: We have already built-in about 10 million tonne of acquisition over 2016. So, next 12-18 months we are expecting more acquisition to come from UltraTech . If I only rollover my acquisition earlier next year which means the fair value will come somewhere around 25-30. So, stock is already building in acquisitions which means that this acquisition is not going to really bolt UltraTech to a really high level. Overall, we are expecting 100 million tonne capacity for UltraTech by 2020-2021. So, we would be expecting more acquisition news in India and outside from UltraTech.
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