Experts say UltraTech deal with Jaiprakash is a win-win

The boards of Jaiprakash Associates and UltraTech Cement on Monday agreed on the long due agreement regarding the sale of JP's cement business to the latter. The total deal size of Rs 16,189 crore, agreed upon now is slightly more that Rs 15,900 crore pegged in the March agreement. Reacting to the news, Jaspreet Singh Arora of Systematix Shares and Stocks believes the deal will largely be positive for UltraTech Cement. Speaking to CNBC-TV18, Singh said even in last minute changes, UltraTech ended up paying only 2 percent extra. UltraTech's total cement capacity would now increase to 91.1 million tonnes per year and would give the company a ready capacity for pan-India operations, he added. Singh is of the view that in one year, UltraTech might outperform other largecaps. Moreover, the deal will take another 10-12 months to fructify and the real impact will come by in FY18, he added.Meanwhile, Sanjiv Bhasin of IIFL, said this is a win-win situation for both the companies and gives a long term hold for the stocks.Below is the transcript of Sanjiv Bhasin and Jaspreet Singh Arora’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: Do you cover Jaiprakash Associates? I am sure you will be covering UltraTech Cements, but your thought on this deal and how do you look at both these stocks?Bhasin: I will summarise it up in what you once said that UltraTech has got a golden deal. They got it at almost USD 122 per tonne and the present valuation of ACC would be close to 170 plus, so it is a win-win situation for UltraTech and it is a huge relief for JP that finally, even though in February-March they were struggling to not go down under, they will have managed to get some reprieve. We still think JP has much more assets on its book. The market cap close to Rs 1,600 crore at around less than Rs 7 on the stock price was a very big opportunity to buy. We still think over the next one year, the market cap should be closer to Rs 5,000 crore if all negotiations and restructuring of balance sheets take place. So, it is a long-term hold if you can on a penny stock, but the assets on hand are hard. But, right now it is a win-win situation for UltraTech which has managed to get a very big deal at almost 30 percent discount to what the fair value would have been.Sonia: So, at Rs 3,400, what is the risk reward looking like for UltraTech for those who missed out on the rally? Is it still worth a buy at this level?Bhasin: Now, the markets will have different contours and volatility. When we have been on your show and I have been advocating to buy those falls, we still think that five pivotal largecaps will hold ground going into 2017. UltraTech would be the one on the cement side would be the best play even though valuations may have reached a crescendo at Rs 3,400. We still think with a one year view, you could get close to Rs 4,500-4,700. The other four picks would be the hardcaps, whether it is Tata Motors, Hindalco, SBI or Dr Reddy. This has been our basket of our top largecap picks which you should use to buy on any decline.Anuj: Your first thoughts on this deal, this revised deal and do you think UltraTech goes back to the highs from where it corrected a bit?Arora: This deal was there in the market for quite some time and it was almost done and out with by the end of March, but some of the last minute changes and some bit of activity on other suitors took it back to the board stage, and ultimately, they end up paying not more than two percent of what they agreed as compared to the March level. So, the figure was, it was USD 115 per tonne transaction and now escalated to USD 117 which does not make too much of a difference for a size of a company of UltraTech which is a mega, 66 million tonne company and does not mind paying that extra bit of Rs 289 odd crore for the kind of opportunity it gets and you will not get this kind of an opportunity elsewhere – 21 million tonnes of almost ready capacity, pan India where you can roll out your advantages in terms of brand premiums, logistics, the raw material, procurement synergy, that is huge. So, at the end of the day, if it had to go, the best bet would have been UltraTech only. So, we remain positive on UltraTech with this deal having gone through and over a one year period, it should easily outperform most of the other largecaps.Sonia: So, with the new cement capacity coming on board, and the exposure to newer markets, what kind of a growth do you forecast for UltraTech for the revenue front and on the margin front over the next 1-2 years?Arora: This deal will take at least 10-12 months to fructify in terms of getting all the approvals on board, which means that you are essentially talking of part of FY18 in terms of the real impact. Even after that, it is going to be short-term earnings per share (EPS) dilutive for most part of FY18. But if you look at the broad picture, it will only emerge in FY19 where you will have most of this incremental operational 17 million tonnes kicking in for UltraTech as a volume growth. So, clearly one has to take a FY19 picture before betting on this acquisition playing out in full force for UltraTech.