In Focus: Did UltraTech Pay Premium For Underinvested India Cements Stake?

UltraTech Cement Ltd. could have negotiated a better deal for the stake purchase in India Cements Ltd. it is planning to buy, according to industry watchers.

The quality of financials logged by N Srinivasan's cement-maker and legacy of underinvested and inefficient assets indicate the Aditya Birla Group-led market leader paid a premium for the stake.

This deal is a little expensive at an enterprise value of $90 a tonne, considering India Cements has a lot of old plants, said Gurmeet Chadha, chief investment officer at Complete Circle.

"The cost of the deal is $90 a tonne, and cost of setting up a [new] plant is also $90 a tonne. So you're getting it at the replacement cost," he said.

Some of the alternatives are still at an enterprise value of $50-60 a tonne with relatively newer plants, Chadha said.

The Aditya Birla Group-owned market leader acquired 19.44% stake at Rs 267 a share, and another 3.4% at Rs 285 per share. Radhakishan Damani and his associates, who hold close to 21% stake, were among the sellers in the secondary market deal, according to people aware of the matter who told NDTV Profit.

The deal values the Tamil Nadu-based India Cements at close to $90 per tonne, in line with the previous transactions seen in the sector. UltraTech's financial investment will not win it control or a board seat in India Cements, despite holding almost a quarter of the shareholding.

For India Cements shareholders, this is the best they could have ever got, Rakesh Arora, founder of Go India Stocks, providing them a favourable exit from the stock.

While it is unclear what will be the game plan for India Cements, the revival of India Cements will require substantial capital investments to upgrade the facilities and provide working capital to compete in a market which has depressed prices and over capacity. India Cements had close to Rs 2,500 crore in debt.

Also Read: India Cements To Be Excluded From F&O Segment

Weak Financials

UltraTech has invested in a southern cement maker in a bid to consolidate its market share in the region. But India Cements has the weakest financials among the prominent cement makers of the country.

The Ebitda per tonne for India Cements, which reflects profitability of operations, stands at Rs 75 for India Cements, in comparison to UltraTech's Rs 1,173 a tonne, according to data collated by NDTV Profit.

The Long Game

Arora expressed reservations over UltraTech going against its acqusition "style" in the case of India Cements. "They go for 100% acquisitions. So maybe there's more to this story which will evolve."

In April, India Cements recently sold its grinding unit in Maharashtra to Ultratech Cement. It also faces capacity expansion issues with limited limestone reserves.

The supposed excess payment to India Cements is so that UltraTech can have a strong manufacturing and back-end setup in Southern India, said Mayuresh Joshi, head of equity research at William O'Neil India.

A collaboration with India Cements will also add to the clinker assets of UltraTech in the region, Joshi said, adding that future synergies between the two should be tracked.

Location of grinding units closer to the target markets is crucial for cement-makers as freight plays a crucial role, Chadha said, adding that this factor is driving acquisitions in the sector. Players are looking at south India as capacity utilisation is still low there, he said.

While business relationship is yet to be established between the two companies, Tushar Chaudhari, research analyst at Prabhudas Lilladher, said the deal can be beneficial if UltraTech can work out a strategic cement supply agreement to gain market share in undersupplied Andhra Pradesh and Telangana belt. Such a collaboration could improve the financial performance of India Cements as volume improves.

Also Read: Ultratech Cement Buys 23% Stake Of India Cements From Radhakishan Damani