Expect JPA's biz to become EPS accretive by FY19-end: Ultra

Jaipraksh Assosiates (JPA) on Thursday inked the much-awaited sale of its cement assets to UltraTech Cement for Rs 15,900 crore. The deal includes the sale of 9 units across states of Uttar Pradesh (UP), Madhya Pradesh, Himachal Pradesh, Uttarakhand and Haryana and an under-construction grinding unit of 4.0 mtpa at UP.

UltraTech will also take over Rs 10,900 crore by way of debt from JPA as part of the deal, said Atul Daga, CFO of the company. The deal is expected to be consummated within the next 12-15 months, he said, adding that the company will not enter JPA’s assets before FY17. UltraTech is taking over 19.2 million tonnes of operational capacity. An additional 2 million tonne capacity will be commissioned in 12-18 months, he said. JPA’s current operational efficiency stands at 600 million per tonne and capacity utilisation is below 50 percent. “Assuming that the deal gets consummated by April 17 when we take over the assets completely, there will be an improvement program that we will run ” Daga said. The aim is to improve operational efficiency by over 50 percent in a year’s time, he said. “Chhattisgarh and eastern Uttar Pradesh markets are extremely lucrative,” he added. Also, the strengthening cement demand across states will boost the growth for the company, he said. The company will become earnings per share (EPS) accretive only by the last quarter of FY19, he said, adding that atleast two years are needed to make the business lucrative. Below is the verbatim transcript of Atul Daga’s interview with Latha Venkatesh, Sonia Shenoy & Nigel D’souza on CNBC-TV18.Latha: When the original memorandum of understanding (MoU) was announced we were given to understand that UltraTech Cement would takeover Rs 16,500 crore of debt. Now you are talking over Rs 11,500 core of debt. Why that difference?A: Firstly, let me just correct, Rs 11,500 stands down to about Rs 10,900. This is a debt amount which comes from the Jaiprakash Associates existing lenders to our books on revised terms as per what we have been able to renegotiate. The balance amount will be again financed through long-term debt. So, ultimately it is a long-term debt deal only for us whether we are taking over the debt from JP books or raising new debt funding. Latha: I can see that you are looking at it from your point of view. I am looking at it from point of view of the seller and bankers to the seller. What is their relief? So, their relief is Rs 10,900?A: Rs 10,900 plus, well from their perspective I would imagine the relief that they would get would be closed to Rs 12,000 or 13,000 crore after a adjustment for working capital, normal adjustment that are done for the purpose of any transaction. So, they should be getting a better bit of Rs 13,000 crore. Latha: You said yesterday that your interest rate is 9 percent, obviously as a AAA borrower they will have to while they get a better more hydrated borrower they will have to suffer a little bit in terms of fallen interest rates. However, 9 percent kind of surprised me because all the banks that are mentioned ICICI Bank, State Bank of India (SBI), IDBI they base rate is between 9.3 and 9.5 percent. How can you get a 9 percent? A: That is correct. I am taking a base rate link borrowing which is from the banks which is coming from the JP lenders that would come as the base rate. Over and above that whatever financing that we need to raise we will be able to raise it below base rate. The rupee bond markets and there are other structures available which will help us raise money. Let us keep in mind and be positive that the rate cuts will also happen.Sonia: If you can just tell us little bit about the EBITDA per tonne as well of the capacity. What does it stand at currently, how much do you plan to grow it by say in the next 6-12 months and also what kind of capacity utilisation does it operate at currently and what does the growth look like? A: First and foremost, the transaction as I mentioned earlier, will get consummated only in the next 12-15 months which means that we will not be entering this asset in the FY17. Looking at the current EBITDA performance, the current EBITDA performance is somewhere sub 600 per tonne and the capacity utilisation is also running below 50 percent. So, assuming that the deal gets consummated by April 17 when we take over the assets completely, there will be an improvement program that we will run and definitely want to bring the EBITDA performance in the shortest possible time close to the levels that we operate at. The markets in which these assets are, Costal Andhra Pradesh, Satna cluster, UP East, all those are very lucrative and very high growth markets. We should be able to improve the EBITDA performance at least 50 percent from where they are in a period of maybe 12 months. It also depends upon the demand growth that comes about in the market. We are already seeing green shoots of improvement in demand in the last two quarters I would imagine have done well. So, that will also go hand-in-hand to help improve the EBITDA performance as well as capacity utilisation. Latha: I wanted to ask you about the Karnataka plant that was left out, as well as hopes in the market at least among the bankers that something will be done even with the Andhra units. Is anything on the anvil at all? First Karnataka.A: There was an issue on the mines in Karnataka and the transaction would not have got completed -- the complications there are on the mines would not have got completed before the deal got closed and that is why we have had to drop that asset.ICICI was running the process of liquidating 22.4 million tonne of capacity, which did not include Andhra. So there was one plant of coastal Andhra, which was there on the table and we have picked it up.Latha: What I am asking is will you at any point in time takeover the other Andhra plants? I am not saying it was part of the original deal at all, I am only asking you if it is sometime on your horizon?A: It is difficult to comment at the moment till we see any details about it.Nigel: I was listening to your commentary and you are talking about improving the EBITDA per tonne by around 50 percent. When will this deal be earnings per share (EPS) accretive? If I am just looking at the numbers if you are functioning at around even 90 percent capacity utilisation with an EBITDA per tonne of around Rs 900 per tonne then you are barely able to take care only of the interest cost. 9 percent we are resuming of closed to around Rs 15,900 crore that will come to around Rs 1,400 crore so when exactly will this deal be EPS accretive? I have got a brokerage note as well from Morgan Stanley that saying that it will be EPS dilutive by nearly 30 percent for FY18, could you clarify on that?A: FY18 will certainly be EPS dilutive. Any acquisition I would imagine which is a debt funded acquisition would be EPS dilutive. We are not looking at it from the EPS perspective. It is much bigger and a much longer story that we are looking at. Consolidation at the right time, the cusp of demand growth, everything looking rough for the industry, having said that, yes it will be EPS dilutive may be two years at least. Nigel: IN FY19 we could see that the EBITDA will take care of the interest cost? A: Start improving, so if you look at last quarter of FY19 you will start seeing improvement because as I mentioned minimum two years will be EPS dilutive in any case. Whilst other thing is, clearly I am cognisant of the fact that there is an interest burden on these assets. Base rate is not what we are looking at we would want to finance it at a rate far more competitive than the base rate. April onwards the base rate concept is also changing, we are yet to see what will be the impact on the bank’s lending rates.Nigel: I want to talk about the 4 million tonne that you will have to put in, additional Rs 450-500 crore approximately. What are your targets over there, when can we see this plant up and running, when can it start functioning, when can we see some kind of EBITDA coming out from there. Give us some guidance about the 4 million tonne that is currently not operational?A: If you look at 21.2 million tonne and then 4 million tonne, within that 4 million is the additional capacity. 17.2 million tonne is operational from day one. Over and above that, we will have from this 4 million tonne, 2 million tonne of capacity also available from day one. So, effectively we would have 19.2 million tonne available. The balance 2 million tonne would require anywhere between 12-18 months to get commissioned. So, when we take over, we will have 19.2 million tonne of operating capacity and 2 million tonne effectively yet to get commissioned. Nigel: There is so much of talk about the entire Birla Group consolidation, we have seen some kind of offloading of shares, etc in the last one month or so. Is there anything happening on that front because we are looking at 100 million tonne, is Century Textiles, is the Kesoram Group, is there any Birla consolidation that we are likely to see come FY17? A: You will be the first guys to break the news to us then only we will come to know about it. So, as of now, I don’t see anything happening on that.