M & A CritiqueUltraTech Cement, India’s largest cement maker and part of the Aditya Birla Group, on December 24, 2014, said its board has approved to acquire two cement plants of Jaiprakash Associates in Madhya Pradesh for an enterprise value of Rs. 5,400 crore. The transaction, which is subject to due diligence, definitive agreements, and regulatory approvals, will strengthen UltraTech’s position as the country’s biggest cement maker and comes at a time when India’s economic growth is poised to accelerate.
TRANSACTION:
UltraTech will acquire two cement units of Jaiprakash Associates located in Madhya Pradesh at an enterprise valuation of Rs 5,400 crore ($853 million).
| ACQUIRED CEMENT PLANT’S DETAILS | |||
| Location of Units | Clinker Capacity | Cement Grinding Capacity | Captive Thermal Power Plant Capacity |
| Bela, Madhya Pradesh | 2.1 MTPA | 2.6 MTPA | 25MW |
| Sidhi, Madhya Pradesh | 3.1 MTPA | 2.3 MTPA | 155MW |
| TOTAL | 5.2 MTPA | 4.9 MTPA | 180MW |
As part of the deal, the Aditya Birla Group firm will acquire Jaiprakash Associates’ integrated cement plant with clinker capacity of 2.1 million tonnes per annum (MTPA) and cement grinding capacity of 2.6 MTPA at Bela in Madhya Pradesh. UltraTech will also acquire a second plant at Sidhi with a clinker capacity of 3.1 MTPA and cement grinding capacity of 2.3 MTPA. The cement factories have captive thermal power plants with a combined capacity of 180 megawatts (MW) of which 25MW is situated at Bela and 155MW at Sidhi.Both the plants are currently functioning at around 80% capacity.
JAYPEE GROUP – BRIEF BACKGROUND:
The Jaypee Group, having interests in areas such as real estate, cement, and hospitality, is the country’s third-largest cement maker after Aditya Birla Group and Holcim Group with an operational capacity of 26.5 MTPA.
Jaiprakash Associates Limited (“JAL”) is the flagship company of the Jaypee Group through which the cement business of the Group is being carried out.
Despite last year’s divestment, Jaiprakash Associates’ standalone debt was Rs 28,164 crore at the end of FY 2013‐14. The company’s interest cost almost doubled to Rs 6,094 crore for FY 2013‐2014 from Rs 3,134 crore a year earlier.
For the quarter ended 30‐Sep‐2014, the company has reported Standalone sales of Rs. 2664.12 Cr., down 11.01% from last quarter Sales of Rs. 2993.66 Cr. and down 15.41% from last year same quarter Sales of Rs. 3149.40 Cr. The company has reported the net profit after tax of Rs. ‐106.48 Cr. in latest quarter. Cement segment contributed Rs 5746.41 Cr to Sales Value (43.81% of Total Sales) for the year ending 31‐Mar‐2014.
ULTRATECH‐BRIEF BACKGROUND:
UltraTech Cement Ltd. Part of the Aditya Birla Group is the largest manufacturer of grey cement, Ready Mix Concrete (RMC) and white cement in India. It is also one of the leading cement producers globally. The company has an installed capacity of 62 Million Tonnes Per Annum (MTPA) of grey cement. UltraTech Cement has 12 integrated plants, 1 clinkerisation plant, 16 grinding units, and 6 bulk terminals. Its operations span across India, UAE, Bahrain,Bangladesh and Sri Lanka. UltraTech Cement is also India’s largest exporter of cement reaching out to meet the demand in countries around the Indian Ocean and the Middle East.
For the quarter ended 30‐Sep‐2014, the company has reported Standalone sales of Rs. 5381.80 Cr., down 4.74% from last quarter Sales of Rs. 5649.46 Cr. and up 19.54% from last year same quarter Sales of Rs. 4502.10 Cr. The company has reported the net profit after tax of Rs. 410.05 Cr. in the latest quarter. Cement segment contributed Rs. 22781.98 Cr to Sales Value (99.03% of Total Sales)for the year ending 31‐Mar‐2014.
DEAL VALUATION
| Particulars | Amount |
| Avg. replacement cost per tonne (A) | 8900 |
| Additional capacity as result of Acquisition (B) | 4.9 million + 2 million* |
| Estimated value of a plant (A*B) | INR 6230 crores |
| Actual price paid | INR 5400 crores |
| Gain | Approximate INR 830 crores + 180Mw captive power plant. |
*:- 5.2 MTPA clinker capacity can be utilised to raise the output by another 1.8- 2.5 MTPA.
At the two units, the clinker capacity is more than the grinding capacity. This gives UltraTech room to further add around 1.8‐2.5 MT a year of cement manufacturing by having an adjacent grinding unit. The enterprise value for a tonne of this deal is roughly around $140 (about Rs 8,900 at 24th Dec exchange rate). At $140, the deal compares well with the prevailing valuations in the 360‐mt‐a‐year cement industry. Rather, the replacement cost of a cement plant comes around $125 (about Rs 7,900) a tonne. Currently, the average enterprise value is about $160 a tonne. UltraTech has also taken into account the replacement cost of setting up a greenfield cement plant of the same capacity while arriving at the enterprise value of the current deal. Analysts feel the valuations of the acquisition (replacement costs of about $140 a tonne) are attractive, with UltraTech trading at replacement costs of about $190 a tonne.(Source: Business Standard)
DEAL FUNDING
The company was yet to complete the due diligence process for the assets it proposes to buy. Granular details of the deal, including what portion of debt associated with the cement plants it would absorb and the cash component, would be worked out later. The details regarding funding of the deals are still unclear.
The move will not burden Ultra‐Tech’s balance sheet even if it plans to fund this acquisition through debt. At the end of the September 2014 quarter, the company’s net debt was Rs 8,500 crore (net of cash on books) and its debt to equity ratio was 0.48. After the deal, the ratio will inch up to less than 0.7.
‘In an interview with CNBC‐TV18 on this latest development, Atul Daga, CFO, UltraTech Cement has said that the overall debt of the company will go up with the deal. Daga further said the company is confident of funding the deal with internal accruals. Cost of borrowing should be somewhere between 8‐8.25 percent.’ Though, the position on this is still unclear.
WHAT DOES IT MEAN FOR ULTRATECH?
● The deal would take UltraTech’s existing capacity from around 62mtpa to around 67mtpa.
● UltraTech is also raising its capacity further organically which would take it to around 71 mtpa level by 2016.
● The deal will help UltraTech, the single‐largest cement firm in the country in terms of capacity, to consolidate its lead over Swiss construction materials giant Holcim, which controls Ambuja Cements and ACC, two of the top four cement firms in the country.Holcim, through its two large cement firms together, has the capacity of around 57‐58 mtpa in India. Lafarge has the capacity of around 11 MTPA. However, Holcim‐ Lafarge combine may have to sell some assets in India to satisfy competition concerns.
● The deal would also augment its capacity at Satna cluster, one of the major cement manufacturing regions of the country.The Satna cluster is an important one for UltraTech’s prior to the deal they did not have a presence in the area. The proximity of the cement plants to key markets, like Uttar Pradesh central and east (and) Madhya Pradesh central and east, makes them an important asset for UltraTech.
WHAT DOES IT MEAN FOR JAIPRAKASH ASSOCIATES?
● Jaiprakash Associates has been looking to pare assets as part of the strategy of the debt‐laden firm to deleverage the balance sheet.
| JP’s Asset Sale Spree | ||
| Units | Buyer | Value (Rs. Cr) |
| Gujarat Cement Plant | UltraTech | 3800 |
| 74% stake in Bokaro Cement Plant | Dalmia Cement | 690 |
| 300 Acres in Greater Noida | Gaursons | 1500 |
| 1.5 MT Cement grinding unit | Shree Cements | 360 |
| Hydel Assets and Thermal Units | JSW Energy | 9700 |
● It has now sold capacities aggregating 13 MTPA over the past two years, for an enterprise value of about Rs 10,000 crore ($135/tonne). It will still retain ownership in 22 mtpa of capacity, including 5MPTA in Andhra and 2.2 MTPA in a joint venture with Steel Authority of India at Bhilai.
● Regarding the current deal analysts feel the central India units were the most profitable ones, as they catered to the north and western markets, where realisations remain strongest. The deal is particularly important for the Jaypee Group to meet its debt reduction target. Jaypee Group, which is sitting on a mountain of debt i.e. over Rs. 55,000 crores (including around Rs. 28,000 crores of JAL) is targeting to reduce its debt by around Rs 15,000 crore this fiscal.
IN COMPARISON WITH THE GUJARAT UNIT ACQUISITION:
This is the second time that UltraTech has bought cement making assets from Jaiprakash Associates. In September 2013, UltraTech purchased two cement plants in Gujarat with a capacity of 4.8 MTPA with 57.5 megawatt thermal power capacity, a captive jetty, and limestone reserve from the Manoj Gaur‐led Jaypee Group (of which Jaiprakash Associates is a part) for an enterprise value of Rs. 3,800 crore.
The enterprise value per tonne of Gujarat cement unit acquired by the Aditya Birla Group firm was $120‐130/tonne. The current acquisition though made at a higher valuation($ 140/ tonne) would be a much better deal as the MP plants are a profitable asset.
INDUSTRY SCENARIO
The Indian Cement sector recorded a significant profitability improvement in Q2. This momentum is expected to continue going forward, driven by demand recovery and, thus, better capacity utilization. Domestic cement production, as reported by the Officer of Economic Advisor, the Ministry of Commerce and Industry, grew 9.8% to 64.96 million tonnes in Q2 over a year ago. Net profit of 37 major companies surged 124% to Rs. 1479 crore on net sales gaining 16% to Rs. 20340 crore. Further, a modest rise in the interest, depreciation and taxation expenses led to profit after tax (PAT) growing a sharp 124% to Rs. 1479 crore. The industry expects incrementally better volume off take in FY2015 and FY2016 with the long‐term demand likely to grow.
CONCLUSION:
The divestment is in line with the Jaypee Group’s publicly announced policy of bringing down Jaiprakash Associates debt and improving its balance sheet. These cement plants will help UltraTech gain a pan‐India footprint as before this acquisition it did not have a presence in the Satna cluster of Madhya Pradesh, which supplies cement to regions like central and eastern Uttar Pradesh and Bihar. It will lead to margin improvements and also customer acquisition for Ultratech Cement as its transportation cost will come down and-and marketing cost is also minimised. UltraTech, which has a strong balance sheet and steady operating cash flows, is currently in the midst of massive Rs 10,000‐crore CapEx plan through which it aims to further increase its cement capacity by 6 mtpa by the FY16 end and invest in associated infrastructure and power plants. This acquisition along with plan organic expansion is one more in a long list, leading to consolidation in the sector. These gathered pace a few years earlier when the Holcim group announced a planned merger of pan‐India company ACC with Ambuja Cement. Later, Holcim and Lafarge announced a global merger. The combined ACC, Ambuja, and Lafarge capacities after expansion are likely to touch 70 mtpa by the end of FY16 in India. In the backdrop, UltraTech, with its planned expansions and acquisitions, gains a slight edge.
