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Jaypee cement assets deal seen as value accretive for UltraTech

The final valuation of the deal may yet change depending on the fate of Jaypee's limestone assets in UP, which the court says is on forest land

Published: Jul 5, 2016 12:49:47 PM IST
Updated: Jul 5, 2016 01:14:38 PM IST
Jaypee cement assets deal seen as value accretive for UltraTech
Image: Shutterstock
According to UltraTech’s intimation to the bourses, Jaypee’s cement plants being acquired by UltraTech have a combined turnover of Rs4,541 crore.

India’s largest cement manufacturer is set to grow larger as UltraTech Cement, an arm of the Aditya Birla Group, agreed to acquire the entire cement making capacity of the Manoj Gaur-led Jaiprakash Associates (JAL) at an enterprise value of Rs16,189 crore.

A final decision to acquire the 21.2 million tonnes per annum (mtpa) cement making capacity from the debt-laden Jaypee Group was taken late Monday evening following a board meeting.

“The proposed transaction is essentially a geographic market expansion, which will lead to UltraTech’s entry into growing markets of India, such as the Satna cluster [in Uttar Pradesh (East) and Madhya Pradesh (East)], Himachal Pradesh, Uttarakhand and coastal Andhra Pradesh,” a statement issued by UltraTech on Monday said. “The operations will be strengthened by the consequent technological upgradation and enhancement in capacity utilisation on a year-on-year basis, creating synergies in manufacturing, distribution and logistics leading to economies of scale and creation of efficiencies by reducing lead time to markets, enhancing competitiveness and thereby benefitting customers.”
UltraTech expects the transaction, which is subject to various approvals from shareholders, lenders and other regulatory bodies, to be consummated within the next one year.

Upon consummation of the deal, which would be the largest of its kind in India, UltraTech’s cement capacity will rise to 91.1 mtpa (including its overseas operations).

The enterprise value at which the Kumar Mangalam Birla-led company has agreed to acquire the Jaypee Group’s cement assets is higher by Rs284 crore over the original deal value.

A research report dated July 4, 2016 by Edelweiss Securities states that though the re-negotiation of the deal value shows UltraTech “in a weak bargaining position, all in all it entails positive medium-term implications for the company. Even assuming the new deal value and building in reasonable price-volume assumptions, we believe the deal is NPV (net present value) positive at Rs48,000 crore.”  
       
The Edelweiss report also points to a potential red herring that may further alter the valuation of the deal. "The gray area is that, subsequent to the deal, the Court has come out with a judgment that substantial acreage of limestone bearing land linked to Jaypee’s UP cement assets has to be returned to the state as it is a part of forest land; and that only a central government permission can help declassify this area as forest land,” the report says. “Our understanding of the transaction indicates that in case the central government doesn’t clear the mining of limestone in UP within six months, the deal value will get proportionately reduced.”

While it isn’t immediately clear why UltraTech decided to hike the consideration it was willing to pay for the assets, recent reports that suggested that Jaypee was in talks with other companies including Sajjan Jindal’s JSW Group, may have had a role to play.  

Agreement between UltraTech and Jaypee on the contours of the deal, which has been in the works for quite some time and even ran the risk of being called off at one stage due to differences in expectation, has also triggered a revision in UltraTech’s earnings estimates. Edelweiss has revised UltraTech’s estimates revenues in FY18 to Rs29,984 crore, a 0.9 percent change over its earlier estimate. Estimated Ebitda (earnings before interest, tax, depreciation and amortisation) in the same period has been revised upwards by 3.8 percent to Rs6,843 crore.

According to UltraTech’s intimation to the bourses, Jaypee’s cement plants being acquired by UltraTech have a combined turnover of Rs4,541 crore.

UltraTech registered a turnover of Rs25,281 crore in FY16, and operating profit of Rs5,109 crore and a net profit of Rs2,287 crore.  

The expectation is that UltraTech will need to take on some amount of debt to finance this acquisition, which it is in a good position to do given the strength of its balance sheet. As on March 31, 2016, the company had a net debt of Rs3,636 crore; a net debt to Ebitda ratio of 0.71 and a net debt to equity ratio of 0.17.

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