Acquisition in UAE could improve Shree Cement’s earnings prospects

ET Intelligence Group: One of India’s low-cost cement producers Shree Cement’s acquisition of the UAE-based United Cement Company (UCC) is a right step in its comprehensive expansion strategy without stretching its balance sheet. Besides several operational advantages, the acquisition is expected to boost the company’s earnings per share (EPS) by 5-7 per cent in the very first year.

UCC, operating in the UAE region for the past 46 years, has a clinker capacity of 3.3 MT and a grinding capacity of 4 MT. It is estimated that the installed cement capacity of the UAE is close to 41 MT. It means that over 10 per cent of the UAE’s capacity is with UCC. And if one adds the clinker capacity, the share of UCC may exceed 15 per cent of the UAE’s total installed cement capacity.

Long legacy and reasonably good share of the UAE’s cement industry add to stable earnings’ prospects for Shree Cement. Also, analysts point out that UCC has operating profit margin in the range of 22-23 per cent in the past four years, which is quite encouraging in a region of the size of the UAE. UCC’s plants are close to Ras Al-Khaimah’s port through which it serves cement demand in the Gulf, the Middle East and East Africa regions. Cement demand in these regions is fairly stable.

As regards the valuation of the deal, the company would be paying $305.24 million (Rs 1,940 crore). This amount would be paid through internal accruals.

At the end of FY17, Shree Cement had liquid investments amounting to Rs 3,390 crore. The acquisition has taken place at an Enterprise Value (EV)/EBITDA of 8.8 and its replacement cost (EV/tonne) of $76.

According to analysts’ estimates, listed cement companies — Fujairah Cement Industries and Gulf Cement Company — in the United Arab Emirates are trading close to EV/EBITDA of 8.6 (trailing). This means the acquisition is not that expensive.

This acquisition of the company shows that Shree Cements is cautiously on the right path of achieving its target of total capacity of 40 MT by FY20 from 29.3 MT at present. This expansion would materialise without much leveraging the balance sheet given its strong cash flows, internal accruals and cost efficiency. The expansion is also timely as the industry is yet to enter a peak demand cycle.

On the valuation front, Shree Cement’s enterprise value (EV) was 19.4 times its FY19 projected EBITDA. Though this looks a bit expensive, this premium is justified given its strong earnings’ growth, almost pan-India geographical presence and light balance sheet.

In the December 2017 quarter, the company’s net sales grew close to 20 per cent to Rs 2,236.2 crore on a year on year comparison. Due to high power and fuel costs and tax, the company’s net profit grew by 7.3 per cent to Rs 252 crore in the quarter on a year on year comparison.

The company’s sales volumes increased by 8.3 per cent in the December quarter in comparison with the last year’s December quarter. Its realisation in selling per tonne of cement improved by 8.4 per cent to Rs 4,007.