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Expands footprint in south India with ICEM deal

Purchasing promoters’ stake in India Cements

* UltraTech Cement (UTCEM) has announced the purchase of a 32.72% stake of the promoters and promoters’ group in India Cements (ICEM) at a price of INR390 per share (cash outflow of INR39.54b). The acquisition cost works out to be USD115/t, which we believe is an attractive valuation and higher than the cost of previous deals in the south region (USD90/t).

* Earlier, UTCEM had made a financial investment in ICEM by purchasing a 22.77% stake. This transaction will increase UTCEM’s aggregate holding in ICEM to 55.49% and will trigger a mandatory open offer to acquire an additional 26% stake at a price of INR390 per share. The transaction is subject to statutory and regulatory approvals, including CCI approval. The deal is expected to be completed within six months.

* ICEM has clinker/grinding capacity of 11.1mtpa/14.5mtpa spread across the South and Rajasthan. ICEM’s capacity utilization stood at 62%/60% during FY23/FY24. It reported an operating loss in FY23 due to significant cost inflation and weak EBITDA/t of INR115 in FY24, due to pricing pressure in its key market (South). ICEM’s debt stood at INR26.0 as of Mar’24.

* In our recent report “Journey of growth, scale and leadership,” we noted that UTCEM is balancing out its pan-India presence through organic and inorganic expansions. We believe this acquisition will strengthen the company’s presence in southern India. We have a BUY rating on UTCEM with a TP of INR13,000, valuing at 20x Jun’26E EV/EBITDA.

Rerating possible for small/mid-size companies

* This deal may further elevate expectations of getting better valuations for acquisition targets. We believe that UTCEM will have to incur additional capex for the modernization of ICEM's plants in addition to providing exit to the promoters at an attractive valuation.

* Hence, companies with a presence in better regions (North, Central, Gujarat) or higher capacities will demand higher valuations, and we may see further rerating in valuation multiples (on replacement cost basis) of small/mid-sized companies.

* We continue to believe that valuation multiples of UTCEM and ACEM will continue to rerate even when there are concerns related to lower cement prices for the last few months. The industry is directionally moving toward higher consolidation, which, in the long term, should improve cement prices.

* In our recent thematic note, we highlighted cost benefits of increasing usage of green power for different companies, where Adani group, UTCEM and JKCE stand out from many other players. The increase in the network of manufacturing capacities can also help to reduce lead distance (higher benefits for UTCEM and Adani group) and hence, higher reduction in cost metrics compared to other players in the industry.

Valuation and view

* UTCEM is maintaining its leadership position in the Indian cement industry, with its long-term expansion strategy in key markets. Over the years, the company has balanced out its pan-India presence with all-round capacity expansions. Earlier (in FY19), UTCEM had higher concentration in the West, Central and North regions. However, the company’s consistent organic capacity expansions and recent strategic acquisitions are balancing its overall market presence.

* The company is targeting cost savings of INR300/t over the next three years. Cost savings would be achieved through an increase in green power and alternative fuel share, a reduction in clinker factor, savings in logistics costs through utilizing larger scale of operation, and operating leverage with higher volume.

* We continue to believe in the company’s ability to gain market share, driven by its extensive operations, nationwide presence, and robust brand equity. We are not changing our estimates as of now. The stock currently trades at 19x FY26E EV/EBITDA. We value the stock at 20x Jun’26E EV/EBITDA to arrive at a TP of INR13,000. Reiterate BUY.

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