MUMBAI: Ultratech Cement’s acquisition of 22.4 MT cement assets of J P Associates is a prudent step in the direction of preparing the groundwork of securing readymade cement capacity and benefit amply once the cement demand gains momentum in the coming quarters. For 22.4 MT cement capacity, the company is paying an Enterprise Value (EV) of Rs 16,500 crore. In terms of cost per tonne of cement, the deal is valued at Enterprise Value (EV) per tonne of $108. This is quite cheap deal for Ultratech especially when seen from the perspective of what it holds for the company in the long term.
First, Ultratech is in fairly comfortable position in funding the deal given its size. If the company opts for debt funding its balance sheet would stretch to a small extent and its net debt to equity ratio would go up to close to 1 from at present 0.25. This is would not stretch its balance sheet enormously given its size. The company may also opt for equity dilution, which can come in handy in raising funds for the acquisition. At present, the company has market capitalisation of over Rs 76000 crore. Of which even if it dilutes say 5- 10%, it may raise close to Rs 4000-7600 crore.
For JP’s two cement plants in Madhya Pradesh, the company had already agreed to pay Rs 5,400 crore. This means that the company can comfortably fund this acquisition even through dilution route. Also on the net debt to EBIDTA front, a key financial parameter which shows how well a company can handle its debt burden, Ultratech is placed well. Ultratech’s net debt to EBIDTA as of FY15 is 1.09. This is quite attractive considering the fact if a company’s net debt to EBIDTA exceeds 4, it is an alarming situation indicating that the company will not be able to handle its debt burden and any additional debt may stretch its balance sheet enormously. Analysts point out that considering JP Associates’ high debt (over Rs 34,000 crore), Ultratech may get favourable lending rates from banks also, which may also not pressure on its balance sheet.
Second, it is Ultratech’s geographical expansion that works in its favour. Besides entry in the central region, it also enhances its presence in Northern region where it has marginal presence. Both these regions are expected to generate high demand in the next five to six years given their low infrastructure development, east and west freight corridors passing through these regions, and lower level of per capital cement consumption in comparison with the national average. This should boost cashflows for Ultratech in the long-term which could come in handy in paying off its interest expense of its debt. Post this acquisition, Ultratech’s capacity is enhanced to 90.7 MT, which means that it may have 20-25% of the industry’s total capacity.
From J P Associates’ point of view, the deal does not make things exceptionally better in terms of its overall business. Analysts point out that J P Associates’ cement business has been generating substantial cashflows and it contributed close to 33% to J P Associates’ standalone EBIDTA. They point out that though it may reduce its mammoth debt by Rs16,500 crore, it also deprives the company of substantial cashflow generating cement assets. As of FY15, on a standalone basis, J P Associates had debt of Rs 32,000 crore. Besides this, its subsidiary Jaypee Cement Corporation Limited (JCCL) had debt of Rs 2,000 crore. This adds up to a debt of Rs 34,000 crore.