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Our Bureau Most analysts welcome UltraTech Cement’s decision to acquire the cement business of BK Birla Group company Century Textiles and Industries through a share swap deal. Century Textile & Industries is to demerge its cement business and merge it with UltraTech.
Post acquisition, UltraTech Cement will become the third-largest cement firm globally (excluding China) in terms of capacity.
In the near term, the deal will depress UltraTech’s margin, as its EBITDA per tonne is ₹970 in FY18 versus Century Textiles’ ₹445 (blended, including clinker volume). As Century Textiles’ cement book value is low, depreciation burden is likely to be less. Thus, the deal would be EPS-accretive, said Elara Capital, which upgraded its rating to “buy” on the stock with a new price target of ₹4,988.
The board of the Aditya Birla Group firm last week approved a scheme of arrangement whereby the shareholders of Century would get one equity share of UltraTech of face value ₹10 each for every eight equity shares with face value ₹10 each.
Besides, UltraTech will issue 1.4 crore new equity shares to the shareholders of Century, which will increase its equity capital to ₹288.58 crore.
Profit-, earnings-accretive
“We view this deal to be positive for Ultratech Cement as the assets are already operational and are going to be profit-accretive right from merger and are likely to be earnings-accretive within one year of merger,” said Teena Virmani of Kotak Securities.
According to Motilal Oswal, “By this acquisition, UltraTech has ensured higher market share with zero lead time for asset creation and at valuation largely in line with greenfield expansions, which we believe is positive.” Motilal expects a target price of ₹4,818 for UltraTech post the acquisition.
Reliance Securities, with a price target of ₹5,100, expects the acquisition to be PAT-accretive (+8 per cent) and EPS-accretive (+3 per cent) in FY20E. “We believe, unlike the previous acquisition, UltraTech will not burn any cash in the initial years of operation, as the plants are already being operated above 74 per cent utilisation level,” it added.
However, Prabhudas Lilladher remains cautious on the deal. “UltraTech is confident to increase margins to ₹900/t (from the current ₹400) over a couple of years. However, we believe that margin improvement would restrict to ₹700 since current profitability already carries the benefits of restructuring done by UltraTech over the past couple of years on pricing and cost front,” it said, and added, “though UltraTech remains the best play in the sector, given its high scale and efficient operations, weak pricing power and expensive valuations limit us to maintain an ‘accumulate’ rating with a target price of ₹4,500.”
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