The stock of UltraTech Cement has rallied four per cent.

The company had on Tuesday evening announced acquisition of two cement units of JP Associates, both in Madhya Pradesh, of total capacity 4.9 million tonnes per annum (clinker capacity of 5.2 mtpa). The deal has been struck for ₹5,400 crore which also prices in the value for two thermal power plants of total capacity 180 mega watt.

The acquisition takes UltraTech’s total capacity to 71 million tonnes per annum, strengthening its position as the largest cement player in India.

The entry into Madhya Pradesh will be a big advantage given that the presence here will make it easy for UltraTech to reach out to cement markets in UP and Bihar where there is a growing demand for cement now. And, given that UltraTech will now be the largest player in Madhya Pradesh, it will have a good pricing power too.

This is the second acquisition in the last two years of JP’s units by UltraTech.

How it compares with Gujarat unit acquisition

>In September 2013, UltraTech had acquired a 4.8 million tonne cement unit of Jaiprakash Associates in Gujarat along with 57.5 mega watt thermal power capacity, a captive jetty and limestone reserve for a value of ₹3,800 crore or $124/tonne. But the current acquisition has been made at a higher valuation of $175/tonne.

UltraTech has said that with the surplus clinker capacity, it will increase its grinding capacity by a further 1.8-2.5 mtpa in addition to the available 4.9 mtpa. Assuming that this happens and the company augments its cement grinding capacity by an additional 1.8 mtpa and spends about $60/tonne on it, the total cost of this acquisition will work out to $146/tonne, which is still not very cheap.

The Holcim group companies- ACC and Ambuja Cement, and UltraTech are trading at an enterprise value of $140-$180/tonne.

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