JP deal will add to UltraTech's capacity, but hurt EPS: Brokerages
While the acquisition will be EPS-dilutive, brokerages are bullish on the stock and expect the company to benefit.
By ET Online | Updated:
MUMBAI: Shares of UltraTech Cement moved up in trade after the company signed Rs 3,800-crore deal Jaiprakash Associates. While the acquisition will be EPS-dilutive for the company, brokerages are bullish on the stock and expect the company to benefit from increased capacity and pick-up in demand for cement in coming quarters.
The acquisition will boost UltraTech's capacity by 9 per cent and raise market share at a time when rivals, including Switzerland's Holcim, are consolidating operations in Asia's third-largest economy.
The enterprise value of the transaction is Rs 3,800 crore. Of this, as much as Rs 3,650 crore is debt, which the Aditya Birla Group company will inherit from the Jaypee unit that will be demerged from Jaypee Cement Corporation.
"The acquisition will add 8 per cent capacity but hurt EPS by roughly 5-6 per cent in year-1 (FY15E). Despite this, we remain buyers of UltraTech for four key reasons: 1) the stock offers potential upside on proforma post-deal valuations of ~9x FY15E-EV/EBITDA & EV/capacity of ~US$130/ton; 2) Co's target of EPS-accretion in 3 years seems realistic to us; 2) We believe the company's execution track record (e.g. earlier L&T acquisition) is strong, 4) balance sheet will stay manageable post deal," said Bank of America Merrill Lynch report.
According to Morgan Stanley report, the deal is medium-term positive from a strategic standpoint for UltraTech Cement, given capacity share gains (with challenges around land acquisition and rising cost of new capacity, lead time to set up capacities is rising) and potential to expand capacity, given adequate land and limestone reserves.
CLSA in its post-deal analysis report has said that its broad calculations indicate the deal will lead to 4-5 per cent EPS dilution in the first year.
"The management expects the deal to be EPS accretive by the third year. We understand that the plant generates Ebitda margins of 5 per cent which would likely move up to 17 per cent in the third year on the back of: a) higher utilisation of 90 per cent+ cf. 60 per cent now; b) better realisations due to stronger UltraTech brand; c) higher trade mix; d) cost optimisation," the report said.
The stock remains the brokerage's preferred pick in the large-cap space.
However, JPMorgan is underweight on the stock. It is of the view that UltraTech's strategy of continuous capacity addition requires a sharp and sustained demand recovery, given the overcapacity in the industry continues to rise.
"Our UW rating is premised on expensive valuations and a negative outlook for the cement sector," the report said.
The acquisition will boost UltraTech's capacity by 9 per cent and raise market share at a time when rivals, including Switzerland's Holcim, are consolidating operations in Asia's third-largest economy.
The enterprise value of the transaction is Rs 3,800 crore. Of this, as much as Rs 3,650 crore is debt, which the Aditya Birla Group company will inherit from the Jaypee unit that will be demerged from Jaypee Cement Corporation.
"The acquisition will add 8 per cent capacity but hurt EPS by roughly 5-6 per cent in year-1 (FY15E). Despite this, we remain buyers of UltraTech for four key reasons: 1) the stock offers potential upside on proforma post-deal valuations of ~9x FY15E-EV/EBITDA & EV/capacity of ~US$130/ton; 2) Co's target of EPS-accretion in 3 years seems realistic to us; 2) We believe the company's execution track record (e.g. earlier L&T acquisition) is strong, 4) balance sheet will stay manageable post deal," said Bank of America Merrill Lynch report.
According to Morgan Stanley report, the deal is medium-term positive from a strategic standpoint for UltraTech Cement, given capacity share gains (with challenges around land acquisition and rising cost of new capacity, lead time to set up capacities is rising) and potential to expand capacity, given adequate land and limestone reserves.
CLSA in its post-deal analysis report has said that its broad calculations indicate the deal will lead to 4-5 per cent EPS dilution in the first year.
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"The management expects the deal to be EPS accretive by the third year. We understand that the plant generates Ebitda margins of 5 per cent which would likely move up to 17 per cent in the third year on the back of: a) higher utilisation of 90 per cent+ cf. 60 per cent now; b) better realisations due to stronger UltraTech brand; c) higher trade mix; d) cost optimisation," the report said.
The stock remains the brokerage's preferred pick in the large-cap space.
However, JPMorgan is underweight on the stock. It is of the view that UltraTech's strategy of continuous capacity addition requires a sharp and sustained demand recovery, given the overcapacity in the industry continues to rise.
"Our UW rating is premised on expensive valuations and a negative outlook for the cement sector," the report said.
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