SHORT VIEW: JP-UltraTech deal may not signal cement revival

Pragya Bharadwaj

UltraTech's acquisition of the Jaypee Group’s cement unit has stock market investors scouting for potential takeover candidates in the sector. But they could do well to be a bit more circumspect, considering that deals could be far and few in between.
The cement industry is in a downcycle, as companies struggle with both pricing and demand in a slowing economy.
Experts feel the Jaypee-UltraTech could be a one-off rather than the onset of a trend. There are many plants up for sale, but few buyers.
The price paid by UltraTech for Jaypee translates into an enterprise value per tonne of USD 124, sharply down from the USD 200 per tonne that Holcim paid for buying stakes in ACC and Ambuja back in 2008.
UltraTech has landed a good bargain. It will get a young plant at less than the cost (USD 140 per tonne) required to set up a new cement plant, including the 2-3 year gestation period. Also, with the new land acquisition norms, a greenfield capacity has become dearer for cement makers. The purchase will enable Ultratech to grow its market share in Gujarat from roughly 20 percent to 35 percent and in country’s fastest growing cement region. Overall, Ultratech’s cement capacity goes up from 54 million tonnes to 59 million tones and it also gains access to 57.5 MW captive power capacity, limestone reserves sufficient for over 90 years at current capacity and a captive jetty. While the actual deal will turn EPS accretive only after 3 years, the Birlas have identified immediate synergies of Rs 30-40 crore through distribution and logistics strengths. Their immediate goal will be to turnaround this plant which is making losses of roughly Rs 700 cr as of FY13.
What does the deal mean for JP Associates, the flagship company of the Jaypee Group?
It will help the company trim its mammoth debt of over Rs 60,000 crore by approximately 6-10%. Assuming EBITDA / ton of Rs 815, brokerage house Macquarie assumes an EPS increase of around 12 percent. Manoj Gaur, CEO & MD of Jaypee Group says the aim to reduce his group’s debt by Rs 15,000 crore this financial year and this deal will be the first important leg in achieving that target. While sale of assets will be difficult in current market conditions, management is looking for buyers for their hydro power plants and other cement assets.