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Ultratech Cements Its Standing In Gujarat With Jaypee Deal
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The deal to buy JP's Gujarat plant could push UltraTech's stock up by 20%
UltraTech has approved the acquisition of Gujarat Cement Unit of Jaypee Cement Corporation. This move could potentially increase the UltraTech's stock value by 20% up to Rs 2086 in the medium term, according to analysts. UltraTech will acquire the 4.8 million MT cement capacity from JP Associates at an enterprise value of $125 per MT. UltraTech guided the acquisition will be effected over the next 6-7 months. UltraTech would a pay a consideration equal to EV less liabilities taken over, which is currently estimated at Rs 1.5 billion and would result in maximum dilution of ~0.32% at current market price of the stock.
Quality asset at a bargain price
The Gujarat plant has an installed clinker capacity of 3.6 million MT and grinding capacity of 4.8 million MT at two locations in Rajasthan. These plants also have almost 100% captive power capability of 57.5 MW. It has 30 MW of GD set power, jetty for sea transportation and a cement bag manufacturing unit for 5 million MT per annum. The plant has limestone reserves for 90 years and has huge land bank of 5470 hectares which can help UltraTech double the plant's capacity in future through brownfield expansions. Given these factors, a valuation of $125 per MT is very-competitive vis-a-vis the current market valuation of $150 per MT.
Leadership position further boosted in the Gujarat market
Post this acquisition, UltraTech's capacity in Gujarat will increase to 12.5 million MT against total installed cement capacity of about 28 million MT in Gujarat with a 44% capacity market share. UltraTech's installed capacity in India post this expansion stands at 56 million MT, and it will go up to 67 million MT over the next two year driven by its ongoing expansions in Chhattisgarh, Karnataka and Rajasthan. In our view, UltraTech can slow down its brown-field expansion of 2.9 million MT in Rajasthan post this deal until it ramps up the utilization of the newly acquired assets.
Multiple margin levers that can be utilized by UltraTech to improve these plants profitability
Going by market estimates, UltraTech commands a Rs 2- Rs 5 per bag premium over the JP Cement brand in the Gujarat market. Hence, this acquisition will positively impact the plants profitability when it starts selling under the UltraTech brand. This can boost these plants operating margins by about 2% to 7%. Margins can further benefit from improvement in plant utilization rates. Currently, these plants are operating at about 70% utilization versus UltraTech's existing utilization rate of 95%. Additionally, the management expects to derive synergy benefits of about Rs 300-400 million per annum from this acquisition from efficient inter plant clinker transfer, better access to Gujarat market, increase in cost efficient coastal movement. Further, UltraTech would benefit from the tax advantage on carried forward business losses and unabsorbed depreciation of the JP Associate plants.
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