Ultratech Cement, the largest cement manufacturer in India, continues to be in a consolidation mode. Post market hours on November 30, the company announced a share purchase agreement to acquire the cements business of Kesoram Industries, in a 1:52 share swap ratio (no-cash transaction). The transaction would add a total cement capacity of 10.75 MTPA to Ultratech and in the much-needed South and Western markets.

One share of Ultratech trading on November 30 at ₹9,000 per share in exchange for 52 shares of Kesoram trading at ₹139 per share implies a 24 per cent premium to Kesoram shareholders. The share swap ratio would imply an EV of ₹7,100 crore for the transaction that includes roughly ₹5,300 crore equity and remaining for net debt. This translates to transaction multiple of $80 EV/ton which compares fairly with recent transactions of the same capacity.

Given the capacity addition in preferred markets, the fair valuation of the assets and the acquisition track record of Ultratech, we expect the deal to be value accretive in the longer term for Ultratech.

Ambitious targets and inorganic mode

Ultratech has an ambitious target to reach a capacity of 200 MTPA of grey cement capacity in the country. Currently, the company commissioned 12 MTPA capacity last year to reach 137 MTPA cement capacity in Sep-23. The company plans to add 28 MTPA by phase-2 of the plan in 2025 and 187 MTPA by 2027 with phase-3 completion. That implies a volume growth estimate of low double digits for the next four years if executed. With the addition of 10.7 MTPA capacity with the current deal, Ultratech has made a strong start to its capacity expansion plans.

Ultratech has a strong acquisition history in its capacity building. More than half of its current capacity has been via inorganic mode. In the last six years, the company has added 21 MTPA from Jaypee Cements ($110 EV/ton in Jul-2016), 6.2 MTPA from Binani ($140 EV/ton in Nov-2018) and consolidated 14.6 MTPA from Century Textiles ($95 EV/ton in May-2018). In addition, it added close to 20 MTPA from organic expansion in the period.

That the company has done well from the acquisitions is evident from the $230 EV/ton the stock trades at currently. The Kesoram acquisition is expected to be no different.

Deal metrics and outlook

The relative valuation for cement acquisitions in the last decade has ranged from $40-50 EV/ton for small or unprofitable cement companies with 1-3 MTPA capacity, $100-120 EV/ton for most other transactions and 150 EV/ton for Adani’s acquisition of Ambuja and ACC. This implies that the $80 EV/ton for 10.75 MTPA capacity Kesoram cements compares relatively well to the industry metrics.

Ultratech being the largest company has a strong presence in North (23 per cent market share as Sep-23), central (34 per cent), and Western parts (37 per cent). South being the largest market in the country, Ultratech has only a 11 per cent market share. With both the plants being acquired from Kesoram located in South (Telangana and Karnataka), Ultratech can plug the gap in Southern market share as well. The company can potentially address 25 per cent of country’s demand in the next few years.

The domestic cement market is expected to benefit from strong demand growth and better margins. With an ambitious infrastructure plan in place and rebound in domestic housing, industry expects strong demand growth in the next five years. As power and fuel costs deflate from their highs in the last two years, manufacturing and logistics costs should aid margin growth. Owing to a strong growth outlook, the industry has been consolidating in the last few years. According to broader expectations, another 60 MTPA capacity in the country may be consolidated in next one-two years by leading players.

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