UltraTech Cement signs MoU with Jaypee for Madhya Pradesh cement plants

MUMBAI: UltraTech Cement has signed a memorandum of understanding (MoU) to buy two cement plants of Jaiprakash Associates in Madhya Pradesh, a deal that will help consolidate its position as India's biggest cement-maker. For Delhi-based Jaypee Group, the deal is part of an ongoing exercise to reduce debt, which stood at Rs 65,000 crore as on March 31, 2014, and would shrink to close to Rs 44,000 crore if this deal is consummated.

The Aditya Birla Group firm will sign a definitive agreement after completing a due diligence process that will start shortly. A late evening press release from the company put the total enterprise valuation of the transaction, including debt, at Rs 5,400 crore. The company's board approved the acquisition on Tuesday.
"The deal will help us scale up our presence in eastern and central UP and eastern and central MP. We have a marginal presence in these markets which is roughly growing at 8-9%," said OP Puranmalka, MD, UltraTech Cement. The acquisition will help the company ramp up capacity by 5 million tonnes to 68 million tonnes. Further, surplus clinker capacity (clinker is a key input for cement) at the two units will enable Ultra-Tech to boost capacity by 2 million tonnes, said the press release.

The plants are located at Satna in Madhya Pradesh. In the near term, it will have a financial impact as UltraTech will have to pay higher interest on the debt accrued through the deal, said Ravi Sodah, analyst at brokerage Elara Capital. "But if you take a view of FY18 or later, the deal will be highly accretive as the region is expected to see minimal capacity addition."

"Utilisation levels of cement plants in FY18 are expected to rise to 90% from the present 85%, throwing up more profits," said Elara Capital's Sodah. The acquisition, if concluded, would mean that the company's plans to boost capacity to 71 million tonnes by 2016 will be achieved ahead of schedule.

UltraTech had acquired the Gujarat units of Jaiprakash Associates, with a total capacity of 4.8 million tonnes, last year. It has earmarked Rs 7,000 crore to expand capacities over the next three years.

"Our capital expenditure for FY15 is expected to be Rs 3,798 crore; for FY16, the company will spend Rs 3,053 crore, and for FY17 Rs 205 crore," UltraTech Cement Chairman Kumar Mangalam Birla told shareholders at the company's annual general meeting on August 6. The deal will also help Jaypee Group pare debt.

The loan-laden group has been selling assets. In November, billionaire Sajjan Jindal's JSW Energy bought two of Jaiprakash Power Ventures' hydro power plants with a combined capacity of 1,391 mw for Rs 9,700 crore. This followed the sale of its Gujarat cement plants in 2013, though the deal was concluded in July 2014.