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Strengthening presence in south through acquisition

Buying cement business of Kesoram Industries

? UltraTech Cement (UTCEM) has announced the acquisition of the cement business of Kesoram Industries (KSI). KSI has cement grinding capacity of 10.75mtpa (clinker capacity 6.3mtpa equivalent to grinding capacity of 8.5mtpa and hence, it has surplus grinding capacity of 2.25mtpa).

? We believe that the enterprise value of this deal would be ~INR77.8b, which will include equity issuance of INR53.8b (1 equity share of UTCEM for 52 equity shares of KSI). KSI had net debt of INR16.6b as of Sep’23; however, we assume debt to be higher at ~INR24b at the time of deal completion, considering accumulated losses, contingent liability and higher amount paid for preference shares. This will lead to an equity dilution of 2.1% for UTCEM.

? The transaction is subject to approval of shareholders and creditors, stock exchanges, NCLT and CCI, and other regulatory authorities. The deal is expected to be completed in 9-12 months.

? EV/t for this transaction works out to be ~USD102/t (adjusted for surplus grinding capacity of 2.25mtpa at USD30/t) vs. UTCEM’s acquisition of Century Textiles’ cement business at USD106/t and JP Group’s cement business acquisition at USD118/t.

Acquisition to help UTCEM achieve capacity of 200mtpa

? 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.

? The company had earlier outlined its plans to raise its domestic grey cement capacity to ~158mtpa by FY25E and ~182mtpa by FY27E. We estimate its organic capacity CAGR to be 9.5% over FY23-27.

? UTCEM’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. We expect the company to further expand its market share through capacity expansions and acquisitions.

Acquisition will increase consolidation in the most fragmented market

? 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.

? Under Phase I & II expansions, UTCEM is adding 15mtpa (31% total expansion) in South, followed by 14mtpa (~29%) in East, 10mtpa (20%) in North, 7mtpa (15%) in central India and balance 3mtpa (6%) in West.

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