In less than a month after acquiring a 22.8 per cent non-controlling stake in India Cements, Ultratech has announced a share purchase agreement with India Cements promoter and related group to acquire 32.7 per cent stake and make it into a controlling stake with 55.49 per cent shareholding. While the earlier transaction was done at ₹268 per share (EV of $90 per ton), the stock has rallied 33 per cent since and the current SPA was done at ₹390 per share (EV of $122 per ton) for the 14.5 MTPA capacity. Ultratech board also approved an open offer to buy 26 per cent stake from other shareholders at ₹390 per share, which is 5 per cent premium to current price. This is triggered by SEBI rules.
We recommended investors to hold the shares of India Cements when Ultratech bought the first stake citing possible speculation of further stake increase to be a support for the stock price. We now recommend investors continue to hold the stock and not tender in the open offer. Ultratech which is the largest cement operator in the country (and soon to be the world’s largest) can address the pressing needs of India Cements and improve its operations which have been on the decline. The purchase is no longer a financial stake, but now a controlling stake. Though India Cements is trading at a premium now, investors can wait for update on future plans of redeveloping the assets to improve profitability before taking a call on the stock. Ultratech’s financial muscle power can lend support for redevelopment of assets
India Cements
India Cements is largely focused on South India - 5 MTPA in Telangana, 6 MTPA in Tamil Nadu, 2.1 MTPA in AP, and 1.5 MTPA in Rajasthan. This should complement Ultratech Cements which only had 15 per cent exposure from the region before the SPA and can improve it to 25 per cent. Ultratech plans on growing to 200 MTPA capacity from its current 157 MTPA in the next three years.
India Cements reported a blended EBITDA per ton of ₹105 in FY24 recovering from loss of ₹146 per ton in FY23. This compared to an EBITDA per ton of ₹900-1000 per ton as recently as FY20-21. Lower utilisation, higher cost of production compared to realisations were cited as the main reasons for the decline.
Owing to working capital and liquidity shortages, the capacity utilisation was at 61 per cent in Q4FY24, which is low by industry standards, although it was an 8-percentage points improvement from previous quarter. Older plants with a higher power requirement, stretched creditors, loss of market share and high debt burden have impacted company’s ability to raise additional working capital.
Ultratech can address the working capital issue with its backing, but will most likely will be a second order effect. The mixed bag of India Cements plants with varying vintage need upgradation to improve profitability. Ultratech has got experience in turning around older plants, internally and recent acquisitions, to take up the task. The parent itself is looking at alternate fuels and renewable energy sources and has made significant strides in the direction to improve efficiency which can be replicated here.
Cement prices while declining in the last few quarters are expected to correct in 2HFY25. The recent round of consolidation driven by Adani Cements/Ambuja and Ultratech in western and southern regions can bring in more predictability in cement prices as well.