Buying Kesoram's Cement Biz To Help Ultratech In Rivaling Adani? Motilal Gives BUY For Rs 10,100 TP

India's largest cement company, Ultratech Cement touched a new 52-week high of Rs 9,152 apiece on December 1st after it announced its plan to acquire the cement business of Kesoram Industries. The smallcap stock Kesoram also touched a new 1-year high and 5% upper circuits. Investors cheered the mega-deal as it brings Ultratech the opportunity to strengthen its presence in southern regions and Maharashtra markets. It will also allow Ultratech to expand its capacity in a phased manner. Brokerage Motilal Oswal is optimistic on the deal and has recommended buying Ultratech shares.

This move is going to help Ultratech in expanding its presence and capacity, something that has been heavily carried by billion-dollar conglomerate Adani Group who has been aggressively expanding its business after acquiring Ambuja Cements and ACC last year. At the latest, Adani also purchased cement assets of Sangh Industries.

Ultratech is the largest cement company in India with a market cap of 2,60,723.04 crore. However, Adani holds the second position in the cement market with its Ambuja and ACC together holding a market cap of Rs 1,23,470.59 crore, making them Ultratech's closest rivals.

Ultratech Cement - Kesoram Deal:

As per the regulatory filing, Kesoram received approval on November 30th for the composite scheme of arrangements with UltraTech Cement and their respective shareholders and creditors, under which, the former is going to demerge its cement division into UltraTech.

The deal involves share exchange ratios: Which are:

- 1 equity share of UltraTech of Rs 10/- each fully paid up for every 52 equity shares of KIL of Rs 10/- each fully paid up.

- 54,86,608 RPS 1 shares of UltraTech of Rs 100/- each fully paid up for 90,00,000 5% cumulative non-convertible
redeemable preference shares of KIL of Rs 100/- each fully paid up.

- 8,64,275 RPS 2 shares of UltraTech of Rs 100/- each fully paid up for 19,19,277 zero% optionally convertible redeemable preference shares of KIL of Rs 100/- each fully paid up.

The transaction is expected to be consummated within 9-12 months subject to the above regulatory approvals.

Ultratech, Kesoram Share Price:

After the deal announcement, Ultratech's share ended at Rs 9,031.35 apiece, up by Rs 30.70 or 0.34% on BSE on December 1st. During this day's trading hours, Ultratech touched a new 52-week high of Rs 9,152 apiece.

Meanwhile, Kesoram shares locked at Rs 146.05 apiece, which was a fresh 1-year high and also 5% upper circuits. on BSE. This meant that on December 1st there were several buyers in Kesoram but no sellers.

Should You Buy Ultratech Cement Share Price?

Explaining how the acquisition will help Ultratech in achieving its capacity of 200mtpa, Motilal Oswal in its research note said, "UTCEM is expanding its domestic grey cement capacity organically by 24.4mtpa under Phase-II and by 21.9mtpa under Phase-III, comprising a mix of brownfield and greenfield projects. These expansions will be commissioned in a phased manner during FY25-27."

Also, Ultratech's timely capacity expansion and increase in capacity utilization have helped the company gain a considerable market share. Its domestic grey cement capacity/volume CAGR at 9%/11% over FY15-24E exceeded that of the industry (at 5% each). As a result, UTCEM's market share has increased to ~26% in FY24E from ~16% in FY15. Motilal's note added, "We expect the company to further expand its market share through capacity expansions and acquisitions."

Further, the acquisition will increase consolidation in the most fragmented market. According to Motilal, the south region is the most fragmented market, with the highest installed cement capacity and the highest number of regional players. The region has a large number of players who have not expanded capacity over the years. Market concentration is also at the lowest level among regions.

It said, "We estimate that after the completion of the ongoing expansion and acquisitions as announced today, the company's capacity share in the south region will increase to ~21% (from ~11% currently) and regional capacity mix in the region will increase to ~24% (from ~15% currently)."

In regards to Adani's expansion and M&As, Motilal pointed out that there have been news reports regarding probable M&A opportunities in the cement sector. In Aug'23, Adani Group acquired cement assets of Sanghi Industries.

The brokerage further said, that after the entry of Adani Group into the cement business and its aggressive capacity expansion plans (aims to double the capacity to 140mtpa by FY28), a few other players have also raised their capacity targets. DALBHARA targets to increase its grinding capacity to 75mtpa/110-130mtpa by FY27/FY31 through organic and inorganic routes. SRCM has stated its target to achieve a capacity of +80mt over the next few years. JSW Group also has ambitions for becoming a serious player in the industry. It aims to invest Rs 180b in the next five years to grow its cement capacity to 60mtpa from the 21mtpa currently.

Accordingly, Motilal believes that the proposed acquisition of KSI's cement business is positive, as this allows industry consolidation and helps UTCEM gain capacity share in the industry. The acquisition will help the company strengthen its presence in the south and Maharashtra markets.

Earlier, Ultratech demonstrated its ability to successfully integrate acquired assets and was able to realize synergies in manufacturing, logistics and distribution networks, leading to improvements in the profitability of acquired assets.

Hence, Motilal's note said, "We are not changing our estimates as of now. We believe UTCEM is scaling new heights! We maintain our BUY rating with a TP of Rs 10,100, valuing at 16x Sep'25E EV/EBITDA."

Also, Elara Capital in its note said, "We believe this acquisition along with the previously announced Phase-III expansion bodes well for UTCEM's long-term growth prospects and would enable the company to achieve its target of reaching 200mn tonne capacity. Further, capacity
augmentation would strengthen UTCEM's place in India, likely making it the biggest beneficiary of demand prospects. UTCEM's H1FY24 EBITDA/tonne was at Rs 989 vs KSI's Rs 516. Given the operational inefficiency of KSI's plants and the regional mix, which would tilt toward the surplus market of South India, the acquisition may have a slightly negative impact on blended margin in the medium term."

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.