Reacting to the prospect of the UltraTech Cement-JP Associates deal, the stock market marked up UltraTech by a mere two per cent, but JP Associates by over six per cent on Wednesday.

The JP Associates stock has risen sharply ahead of the deal as well, putting on 25 per cent in the last five days.

But the deal suggests that the market may have taken a positive view of what it can do for JP Associates and a sombre view of what it means for UltraTech Cement. After all, JP Associates’ effort to lighten the huge debt on its balance sheet by selling part of its core cash-generating cement business has to be viewed as a distress sale.

By buying the 4.8-million-tonne cement unit for Rs 3,800 crore, UltraTech Cement has acquired fresh cement capacity at bargain prices. The deal values JP Associates’ unit at an enterprise value of $124/tonne. This is an attractive price and is at a sharp discount to the current valuations of the Holcim Group companies and that of UltraTech itself. Currently, UltraTech Cement trades at an enterprise value of $143/tonne and Ambuja Cements at about $140/tonne.The deal does not materially increase UltraTech’s debt to equity ratio which will stand at 0.5 post deal.

The deal reaffirms UltraTech’s position as the largest cement producer in India with a total cement capacity moving up to 59 mt a year. The deal also brings with it 57.5 MW power capacity (thermal), limestone reserves (that can last for 90 years at current capacity) and a captive jetty, all of which may help reduce costs for UltraTech Cement and may provide synergy as well.

Also, Gujarat being a market where cement supply and demand are neck-and-neck and the capacity utilisation of producers at over 80-85 per cent, UltraTech can make the most of this acquisition now.

Gujarat is also strategically well located from the point of view of exports. The grinding units of JP Associates will also help the company cut its logistics expenses due to proximity to key markets.

For JP Associates, which had over Rs 60,000 crore in debt on its consolidated balance sheet as of March this year, this may only be the first of the moves required to climb out of its debt problems.

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