What It Means For UltraTech To Acquire Kesoram's Cement Business
Brokerages see the acquisition strengthening UltraTech Cement's number one position by gaining capacity share.
UltraTech Cement Ltd.'s decision to buy Kesoram Industries Ltd.'s cement business for Rs 5,379 crore will help to expand its businesses in the southern and western markets of India, according to brokerages.
Brokerages including Morgan Stanley, Motilal Oswal and Jefferies see the acquisition as a positive that would help strengthen UltraTech Cement's number one position by gaining capacity share.
The acquisition includes Kesoram's 10.75 million tonne per annum combined clicker and grinding capacity and the 0.66 million tonne per annum capacity of its packing plant.
A Positive For UltraTech Cement
The deal will also help drive economies of scale and, thus, potential operating synergies, said Morgan Stanley.
"The transaction will provide UltraTech the opportunity to extend its footprint in the highly fragmented, competitive and fast-growing Western and Southern markets in the country," said UltraTech in an exchange filing.
Motilal Oswal estimates that post-scheme completion, UltraTech's capacity share in the south region will increase to 21% from 11% currently, and the regional capacity mix in the region will increase to 24% from 15% currently.
Jefferies does view the acquisition valuation tad on the higher side in the background of the recent acquisition value of Sanghi Industries by Ambuja Cements, JPA assets by Dalmia, or the phase 2/3 expansion unit capex of UltraTech. However, the brokerage expects Kesoram's unit to see a profitability uptick as it is fully operational and ramped up, unlike the case in the other two M&A deals mentioned. Additionally, access to working capital, premium pricing at Ultratech, a better product mix, and synergies with the nearby Ultratech plants in Rajashree will benefit the unit.
Impact on Indian Cement Industries
The deal is also a positive for the Indian cement industry. In the medium to long term, the cement industry will continue to see mergers and acquisitions driving capacity due to issues related to overcapacity, volatile demand, and debt servicing, among others, according to Jefferies. The brokerage also expects smaller, inefficient players to keep vacating spaces for larger, more efficient players.
Morgan Stanley stated that the acquisition reduces the risk of excess organic supply in the medium term, while Motilal Oswal stated that the acquisition allows industry consolidation.
Shares of UltraTech Cement were trading 0.027% higher at Rs 9,006.1 apiece, compared to 0.62% rise in the Nifty 50 at 10:33 a.m.
At market open, Kesoram Industries' shares hit upper circuit at 4.99% at Rs 146.35 per share.
