'Reduce' rating to Ultratech Cement shares: Impact of Jaypee asset buy

Sep 23 2013, 20:21 IST
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SummaryStrategic acquisition at bargain price, but earnings contribution could take time.

After prolonged speculation, UltraTech Cement Ltd is looking to acquire the cement assets of Jaiprakash Associates Ltd in Gujarat for a consideration of R38 bn. While the transaction could be earnings dilutive in the near term for UltraTech Cement (capacity utilisation of 65% at Gujarat), it helps UltraTech Cement further consolidate its position in the West and allows JAL to redeem a fraction of its debt—R36 bn out of consolidated debt of R630 bn.

UltraTech Cement shall take over all the assets and liabilities of the unit and the balance consideration shall be paid by issue of equity shares of UltraTech Cement to Jaypee Cement Corporation Ltd’s (JCCL) shareholders, subject to a maximum of R1.5 bn. We note that the Gujarat plant operated at a capacity utilisation of 65% for FY13 and also includes (i) 58 MW of captive power plant, (ii) 30 MW of DG (diesel generator) capacity, (iii) 500 mt (90 years) of limestone reserves, and (iv) 2,500 DWT barges for transportation.

Ultratech stock performance

UltraTech Cement’s ownership of the Gujarat cement plant helps it further consolidate its share in the West market (extant capacity of 8 mtpa pre-acquisition), and prevents the entry of an aggressive competitor, implying improved pricing discipline. However, the acquisition shall likely be earnings dilutive as (i) the plant currently operates at a utilisation of only 65% in its second year running, not contributing much to operating profits, and (ii) the deal shall result in additional debt of R36.5 bn. At an enterprise value of R38 bn (138/share of UltraTech Cement), Ebitda (earnings before interest, taxes, depreciation and amortisation) contribution from the plant would be approximately R4.5 bn in FY15e in an optimistic scenario, assuming (i) capacity utilisation of 73%, (ii) realisations of R5,534/tonne and (iii) profitability of R1,265/tonne.

Assuming a pessimistic scenario in which the extant operational performance of JCCL Gujarat is sustained at (i) capacity utilisation of 65%, (ii) realisations of R4,035/tonne and (iii) profitability of R49/tonne, the deal shall dilute Ultratech earnings by R13/share (12%) for FY2015e. We maintain our Reduce rating on the stock with a target price of R1,650/share.

Jaiprakash Associates—asset sale initiates the process of de-leveraging: While the deal shall result in reduction of JAL consolidated debt by R38 bn, it is an important start to the much anticipated de-leveraging post an era of hyper capacity expansion. The sale of the cement

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