UltraTech to acquire demerged Cement division of Century Textiles

UltraTech to acquire 13.4MTPA cement capacity in from Century Textiles at an implied valuation of $106/tn.

May 20, 2018 02:05 IST India Infoline News Service

UltraTech Cement

Century Textiles & Industries (CTIL), today, announced to demerge its cement business (13.4MTPA) and merge it with UltraTech, as the company looks at debt reduction and focus more on its real estate business. CTIL aims at unlocking the value of cement business for the shareholders and deleveraging of the balance sheet.

As per the press release, UltraTech will get CTIL’s cement division consisting of (a) 3 integrated cement units with a total capacity of 11.4MTPA (excluding 1.2 MTPA, for which statutory clearance is pending), (b) one grinding unit (GU) of 2MTPA, (c) 8.5MTPA clinker capacity, (d) 117MW TPP (adequate to meet >80% of total power requirements), (e) limestone reserves of more than 35 years and (f) rail infrastructure at all units. The cement plants are spread across four states - Madhya Pradesh, West Bengal, Maharashtra, and Chhattisgarh. Upon the consummation, UltraTech would become the 3rd largest cement player globally (ex-China) with a total cement manufacturing capacity of 109.9MTPA (including its overseas operation) and captive power capacity of 1,099MW.

This transaction will provide UltraTech an opportunity to further strengthen its presence in the competitive and fast growing markets of east and central India and expand its footprints in western and southern cement markets. The company would also benefit from various synergies, namely, economies of scale, logistics, strong distribution network, reduction in time to market and availability of requisite infrastructure with the cement plants.

UltraTech’s capacity post CTIL’s cement asset acquisition

Zone

Capacity (MTPA)

Existing

Acquisition

Post - Acquisition

East

11.7

4.4

16.1

Central

21.1*

4.2

25.3*

West

21.7

4.8

26.5

North

17.6

-

17.6

South

20.5

-

20.5

All India

92.5

13.4

105.9

Source: Company, IIFL Research; *Including 5.7MTPA under commissioning by March 2019E

Turnover of the CTIL’s cement business as on March 31, 2018 was Rs4,306cr with an EBITDA of Rs544cr (adjusted for one-time gain of Rs51cr) and EBITDA/tn of Rs367/tn. The cement plants of CTIL are currently operating at ~75% capacity utilization.

Valuations – acquisition at implied EV of $106/tn for the integrated units,

The Board has approved the swap ratio of 8:1 for every eight fully paid-up equity shares of Rs10 each held in the CTIL, one fully paid-up equity shares of Rs10 each of UltraTech Cement will be issued. In addition, UltraTech will also have to pay Rs150cr for additional limestone mines acquired by Century (for Raipur plant).

Thus, UltraTech would issue ~1.4cr shares, increasing its equity share capital by 5.08% on existing equity share capital base. Promoter holding in the company will increase from 60.98% to 61.22% post the acquisition. The transaction is subject to necessary approvals (shareholders and creditors, CCI, NCLT and other regulatory approvals) and is likely to be completed within 6-9 months.

The acquisition is estimated to be profit accretive from year one itself.

Acquisition at implied valuation of $106/tn

Particulars

Rs cr

Equity Value @ Rs4,026/share (30 days average share price)

5,621

Likely debt to be taken over

3,000

Total Enterprise Value (EV)

8,621

Less: Assumed EV for GU of 2.0MTPA*

536

Implied EV for Integrated Capacity of 11.4 mtpa**

8,085

Implied EV for Integrated Capacity of 11.4 mtpa ($/tn)

106

Source: Company, IIFL Research 

The implied valuation for the integrated cement units stands at $106/tn, which is much lower than recent acquisitions in the cement industry. The lower acquisition cost is on account of (a) some of the cement plants of CTIL are old and require significant capex to modernise and (b) high maintenance capex for operations. 

Prima facie an attractive and favourable deal for UltraTech

We believe this deal is favourable for UltraTech, as it has got ready to use assets at lower valuations. Given the track record of UltraTech with the past acquisitions, we believe company has a great scope to improve, both, the productivity and profitability of the acquired assets. Though the aggressive acquisition spree and the integration of acquired assets can be a near-term challenge for UltraTech, however, in the long term it is poised to be best placed cement brand with a strong pan India presence. 

What the deal holds for Century Textiles & Industries 

CTIL currently has four divisions - cement, textiles, pulp & paper and real estate. In order to upgrade, modernise and grow these businesses, the company requires significant capital as the current leverage and cash flow profile constrains this growth. Hence, the company has approved the demerger of its cement division along with associated liabilities (including debt of ~Rs3,000cr). This would bring down CTIL’s leverage by a meaningful amount i.e. from net debt/EBITDA of 3.1x to 1.6x. 

CTIL intends to focus more on its real estate business, which provides the company growth opportunity supported by strong brand Birla Estates. Company has existing land parcels in Worli, Mumbai (30 acres), Kalyan, Mumbai (132 acres) and Pune (45 acres), where company is rolling out its development plans for premium and mid-income housing and commercial space. Moreover, it has signed a MoU to develop 1mn sq.ft. of residential project in Gurgaon. Company plans to enter into similar MoUs to develop a residential, commercial and retail portfolio to achieve this plan. This would require significant funding over the next 5 years and through demerger of cement division (along with the associated debt), company has taken one step towards the same by deleveraging its balance sheet. 

UltraTech has organised a conference call on May 21, 2018 (at 9:30am) to discuss the deal.


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