Jaypee-UltraTech cement biz deal: Here's what analysts are saying

Debt-ridden Jaypee Associates has sold most of its priced cement business to the Aditya Birla group company UltraTech Cement for upwardly revised Rs 16,189 crore. Here’s what you need to know about the deal and analysts’ expectations: How was the deal done? The Jaypee group, which has a debt burden of about Rs 58,250 crore  as of March 2016, was facing pressure from lenders, who had threatened to invoke the strategic debt restructuring (SDR) option on the company. In June, the group defaulted defaulted on loans and other payments worth Rs 4,460 crore. On a consolidated basis, it failed to repay Rs 2,905.6 crore in principal amount to banks and another Rs 1,558.93 crore crore in interest payments. Jaiprakash Associates owes over Rs 30,000 crore to a consortium of lenders led by ICICI Bank and the sale of its 21.2-million tonne cement business is very crucial for the promoters (the Gaur family) to continue in business. The banks had decided to invoke SDR against the company.  It is owing to this that the group hiked the sale value of 21.2 million tonne per annum (MTPA) cement assets to Rs 16,189 crore, from Rs 15,900 crore agreed to earlier in March. The decision was taken at the board of directors meeting, convened at a short notice, of the Japyee Group flagship firm Jaiprakash Associates to discuss the progress of divestment plans and other issues. Ultratech Cement has also agreed to pay an additional amount of Rs 470 crore for completion of 4 million tonne per annum (MTPA) grinding unit in Uttar Pradesh. The deal of Rs 16,189 crore is the enterprise value. What are the managements saying? Jaypee Group Executive Chairman Manoj Gaur said the Jaypee Group is determined to reduce its overall debt through its proactive divestment initiatives to help the Group tide over these current turbulent times caused by economic slowdown in the country. Post the deal, the Jaypee Group shall retain an aggregate cement manufacturing capacity of 10.60 MTPA with plants spread in the states of Madhay Pradesh, Uttar Pradesh, Andhra Pradesh and Karnataka. The Group would continue to leverage its expertise in the fields of engineering and construction, real estate and project execution in a committed manner. UltraTech said the proposed transaction is essentially a “geographic market expansion” which will lead to the company’s entry into growing markets of India, such as the Satna cluster in Uttar Pradesh (East) and Madhya Pradesh (East), Himachal Pradesh, Uttarakhand and coastal Andhra Pradesh. What are the analysts saying? Post the acquisition, upmove in UltraTech Cement shares could be capped over the next year or so, say analysts, although they expect the deal to bear fruit for the company in the long run as the near-term outlook for the sector remains subdued. Reflecting the broad-market sentiment, UltraTech shares traded nearly 0.6 percent lower at Rs 3,390.85 on the BSE after surging 5.5 percent in early trade. After surging for six straigh trading sessions, the benchmark Sensex has taken a breather today, falling around 0.3 percent or 73.05 points down at 27,205.71. On the other hand, JP Associates’ shares overcame the sluggish market sentiment and shot up 29.4 percent to trade at Rs 11.75 a share on BSE. “For UltraTech, the numbers post the acquisition will get reflected only in FY18 earnings. What we now see is that the deal will is in the range of $120/tonne for the company which is relatively a very good deal, as any greenfield project in the country today would cost anywhere in the range of $160-200 per tonne,” said Rohit Natrajan, cement analyst with IDBI Capital. According to Natarajan, UltraTech shares may rise up to Rs 4,000 per share over the next 18 months or so. However, the demand for cement is relatively weak in central and northern region, where UltraTech’s cement assets from JP Associates lies. With greenshoots in the economy visible over past 4-6 months, demand scenario could improve going ahead, expects Natarajan. On the other hand, G Chokkalingam, founder and managing director, Equinomics Research & Advisory, says the current demand scenario for cement has been region-specific, and most of the cement companies are trading above 20-30 times PE. “A bubble seems to be developing in the mid and small-cap cement stocks, as the demand has been in low single digits while earnings has failed to match the valuation,” said Chokkalingam. With PTI inputs