{LONGTERMINVESTORS} Stock Update-UltraTech Cement

April 01, 2016   Stock Update UltraTech Cement Reco: Hold PT: Rs3,580 CMP: Rs3,204 Deal done but see limited upside post recent appreciation; downgrade to Hold   Key points UltraTech consolidates its leadership position with acquisition of JP Associates' cement business: UltraTech Cement (UltraTech) has finally signed the deal (slightly tweaked the deal value lower by Rs600 crore, excluding Karnataka grinding unit with 1.2MT, due to Competition Commission of India [CCI] hurdle) with JP Associates to acquire 21.2mtpa plants at an enterprise value (EV) of Rs15,900 crore, at an implied EV/tonne of $110 (subject to the amendment of MMDR Act and other approvals which can take 12-15 months). The deal also includes a 4-mtpa grinding unit in Uttar Pradesh under the implementation at a cost of Rs470 crore which will be paid separately other than the above amount. The deal would make UltraTech the undisputed largest player in India and it will be among top five cement companies globally. Within India, the acquisition further strengthens its presence in the central and southern India. Earnings dilutive initially, long-term synergy remains favourable: The acquisition of JP Associates' cement plants which have lower capacity utilisation (sub 50%), high debt (interest is also high due to the credit rating of JP Associates) and lower selling price (due to 2nd tier brand) in the initial years will remain earnings dilutive for UltraTech (dilution of around 18-20% in FY2018E). However, UltraTech is a premium brand (higher pricing capability) with greater acceptability in the market which will be beneficial for the company to improve its utilisation level of newly acquired plants (JP Associates). Over the long term, the deal will benefit UltraTech in terms of synergy by entering newer markets, logistics benefits, working capital management and consolidating its leadership position in India. Downgrade to Hold after run-up: Since our update on March 4, 2016, the stock has appreciated by 10% on account of change in pricing dynamics for the cement companies across the country (except south) and long-term positive effect of JP Associates deal. In the current update, we have not factored in any revision in estimates since the approval and amendment of MMDR Act still remain to be keenly watched along with the approval from CCI. Though UltraTech remains among our preferred pick in the cement sector, due to its leadership position and healthy balance sheet, we see limited upside to our price target and consequently downgrade the recommendation to Hold from Buy. Currently, the stock is trading at an EV/EBITDA and EV/tonne of 12.3x and $191/tonne respectively of its FY2018E earnings. We have maintained our price target of Rs3,580.     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

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