UltraTech Cement Ltd is gradually advancing towards its long-term target of 200 million tonnes (mt) capacity expected by FY30. The company’s recent acquisition of Kesoram Industries’ cement division is a strategic move in an increasingly competitive market, triggering a hunger for market share gains among large cement manufacturers.
Notably, UltraTech’s recent expansion into Jharkhand with the acquisition of Burnpur Cement’s 0.54 mt cement grinding unit for ₹170 crore marks a significant step. This move not only introduces UltraTech into a new market butis also expected to reduce its logistics costs given that it did not have production capacity in Jharkhand.
These acquisitions along with planned expansions should accelerate UltraTech towards its expansion target. Post completion of phase-II and phase-III expansion and announced acquisitions, UltraTech’s pan-India capacity market share is likely to improve by 350-400 basis points going ahead, said an Emkay Global Financial Services report.
The Kesoram deal would give UltraTech an entry into Telangana and strengthen its foothold in the south and west markets. Kesoram has two integrated cement units at Sedam (Karnataka) and Basantnagar (Telangana) with a total installed capacity of 10.75 mtpa and 0.66 mtpa packing plant at Solapur, Maharashtra.
According to some analysts, the deal’s valuation is a sour point. This is a share-swap deal under which Ultratech will issue 5.974 million shares to Kesoram shareholders in the ratio of 1:52.
As per Jefferies India’s calculations, UltraTech’s current share price of about ₹9,000 implies an equity value of around ₹5400 crore. Including Kesoram’s estimated debt of about ₹2,200 crore, the acquisition enterprise value (EV) works out to nearly $100 per tonne for integrated capacity, and around $30 per tonne for excess grinding.
This appears a tad on the higher side than Sanghi Industries‘ acquisition by Ambuja Cements or Jaiprakash Associates’ cement assets deal by Dalmia Bharat, according to Jefferies.
Investors don’t seem perturbed by this. UltraTech’s shares hit a new 52-week high of ₹9,163.40 on Friday.
UltraTech’s track record of turning around earlier acquired companies (Binani Cement and Century Textiles’ cement assets) and extracting synergy benefits from them is said to be a comforting factor here. Under UltraTech’s wing, the profitability of Kesoram’s unit is also poised to further improve. Some brokerages have though retained UltraTech’s FY24/FY25 earnings estimates.
Post-acquisition, UltraTech’s total capacity, including its overseas operations, will reach 149.14 mtpa. However, timely regulatory approvals remain critical for the completion of this deal, expected within 9-12 months.
UltraTech’s stock has seen a 30% rise in 2023 so far, buoyed by robust volume growth and strategic capacity additions. But the valuation, though lower than Shree Cement’s, is not cheap. At FY25 EV/Ebitda the stock trades at a multiple of 17 times, showed Bloomberg data.
Sharp upsides would hinge on the pace of capacity expansions, volume growth trajectory, and input cost movements. Negative surprises on any of these could hurt Ultratech.
