Significance of UltraTech’s Acquisition of Jaypee Cements

Why UltraTech’s acquisition of Jaypee Cements is significant…

The recent acquisition of a stake in key cement plants of Jaypee Associates by UltraTech is significant in more ways than one. The total cement capacity acquired by UltraTech amounts to 21.2 million TPA of capacity at Rs.16,189 crore and forms nearly 2/3rd of the total capacity of Jaypee Associates at 33 million TPA. There are 3 significant things to be understood…

Valuations are reasonable…

Normally cement acquisitions are done at a certain $/ton of Enterprise Value (EV). The benchmark is normally the replacement cost, which is the cost that a company would have to incur to set up a plant of similar capacity. Currently, replacement cost of cement is nearly $120/ton. Against this replacement cost, the deal between UltraTech and Jaypee has happened at around $122/ton. This is significant because most cement deals have happened in the range of $120-$150/ton, with some private equity deals happening at as high as $200/ton. From that perspective, it can be said that UltraTech has surely got the capacity at a very attractive price.

What does it mean for Jaypee…

The Jaypee group has already been under tremendous liquidity strain with the consortium of banks headed by ICICI Bank applying pressure and pushing for strategic debt restructuring (SDR). While the overall Jaypee group has an outstanding debt burden of Rs.65,000 crore, Jaypee associates alone has a debt burden of Rs.30,000 crore. This sale will help Jaypee reduce the debt burden by nearly 50% from the current levels. This gives the Jaypee group the much needed breather as it prepares to put more business properties on the block.

It is all about consolidation…

For the acquirer, UltraTech, this buyout is all about the consolidation that is happening in the cement industry. Currently, the two major cement companies in India, ACC and Ambuja Cements, are part of the Holcim Group of Switzerland. Globally, Holcim has already merged with Lafarge of France. Post this acquisition of Jaypee’s cement assets by Ultratech, nearly 50% of the total supply of cement in India will be cornered between Holcim, Lafarge and UltraTech. In an industry where the manufacturers have consistently lost pricing power, this consolidation will go a long way in bringing the pricing power back to the suppliers.

Cement is still a regional market in India and it is the market in the North and the West that has been the most sought after. It is in the North and the West that this consolidation is happening and that could mean an upper hand for cement companies. Most likely, this could mean a positive re-rating for cement business in India. ©

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