After selling its cement business to UltraTech, JP can now concentrate on its core

business and reduce the piling debt from its books

The cement industry is reporting a series of small and mid-sized acquisitions as it went
through a period of slowdown and challenges surrounding land acquisition and regulatory
clearances which decelerated launch of Greenfield projects. Pending infrastructure
projects and a poor state of real estate have affected demand over the past few years.
While several sellers were forced to divest assets due to stretched balance sheets, some
opted out of the business due to strategic reasons. This is benefiting the large business
houses with deep pockets who are looking to pick stressed assets at lower valuations.

Faced with rising bad loans and the Reserve Bank of India’s March 2017 deadline to
clean up their debt-saddled books, banks have been promoting companies with large
loans to sell assets.

Concrete Trouble
India’s largest cement-maker UltraTech Cements Ltd. (UT) had to call off a Rs 5,325
crore deal to buy Jaiprakash Associates Limited’s (JP) two cement plants in Madhya
Pradesh (5 MTPA) as the Bombay High Court rejected the scheme of arrangement citing
the new MMDR Act as the prime reason.

Under the Mines and Minerals (Development and Regulation) Act (MMDR Act), mining
rights do not get automatically transferred to a new owner unless the acquisition is 100%.
Ownership of mines can only be obtained in auctions. Major cement companies are
expecting an amendment in the MMDR (Amendment) Act 2015, to allow the transfer of
limestone mines automatically to the buyers in case of mergers and acquisitions.

Anatomy of the deal

*including unit in UP under implementation
This will be the largest deal in the Indian cement sector and it comes two days after JP
failed to get court approval for a transfer of rights to mine limestone in MP.

UltraTech Cement acquires Gujarat unit of Jaypee Cement Corporation

UltraTech Cement, an Aditya Birla Group Company, has acquired the 4.8-million tonne
per annum (map) Gujarat unit of Jaypee Cement Corporation, for Rs 3,800 crore. As part
of the deal, UltraTech will take over a debt of Rs 3,650 crore.

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Possible structures
Considering various legal and compliance issues, the structure selected to transfer the
undertaking along with mining rights for executing the transaction effectively can change.
Structure below is based on the assumption that amendment in MMRDA Act will be
passed/ not passed-

1. If the amendment goes through

 1. It is a clear asset purchase (including mining rights) which may be structured
by hiving off the entire cement capacity to be transferred into a stepdown
subsidiary of JP and then 100% stake will be sold to UT.
2. Other option would be to directly sell the cement plants through slump
sale. Implications– In option A, there will be no implications on demerger of
cement division to 100% subsidiary but capital gains (Income Tax) on slump
sale based on the transaction value and the net worth of the divisions when the
division is sold.
2. If the amendment is rejected
The divisions can be transferred by carving out a separate entity that will own JP’s
other businesses, such as hotels, construction and real estate which will apply for
listing. The residual company left behind will own the cement division to be
transferred which can be merged with UT and sale proceeds to be given to the
bankers to the extent of sale proceeds of promoters holding. Implications– There
will be no implications on demerger of other divisions (hotels, construction and real
estate), though promoters of JP will end up paying some capital gains tax on the
sale of shares.

UltraTech Cements Ltd: The acquirer

Kumar Mangalam Birla’s cement flagship firm UltraTech Cement is part of the Aditya Birla
Group and a subsidiary of Grasim Industries with a total capacity of around 67.7 MTPA.
It is the largest manufacturer of concrete in India and the largest exporter of cement and
clinker from India. UT accounts for a third of the Aditya Birla Group’s market capitalisation.

What’s in it for UltraTech?

1. Capacity: The deal will increase its installed capacity by a whopping 25% to 92.3
MTPA. UT will become one of the five largest cement makers in the world. Capacity
per share would rise from 0.25 tonnes/share to 0.32 tonnes/share. EBITDA would
reduce from around Rs. 68 crore/MTPA to Rs. 63 crore/MTPA.

2. Valuation comparison:

Particulars MTPA Rs/tonne

Comparable (Reliance Infra sold to Birla Corp) 5 9520

Earlier Deal between UT and JP (rejected) 4.8 7942

Current deal including the earlier deal 18.4 8967

3. H E N C E , B AS E D O N T H E AB O V E F I G U R E S AN D O T H E R AN AL Y S I S , T H E DE AL V AL U AT I O N
S E E M S T O B E I N T H E F AV O U R O F U T .
 4. Market share:
1. Access to markets in central India, where it has no presence.
2. Improve market share in the key northern, central and southern zones where
its presence is either weak or non-existent.
3. Market share will expand from 17% to 22% after this transaction.

5. Fund Raising: Assuming the company finances the deal through internal accruals
of Rs 2,000 crore and funding the balance by 60% debt and 40% equity, its debt
to equity ratio would rise to 0.87 from 0.40 and equity would be diluted by about
7% (assuming no preferential allotment). Alternatively, if it is assumed that deal is
financed entirely by debt then debt equity ratio would rise to 1.29.
6. Sustainability: Based on our calculations, capacity acquired for $132/tonne would
require $21.6/tonne in EBITDA to generate a Return on Equity (RoE) of 14%. By
contrast, the assets being acquired have reported an EBITDA/tonne of below
$10/t. UT reported EBITDA/tonne above $15/t, which is still lower than what
UTCEM is paying in this latest deal (to be EVA neutral).

Demand cycle at the cusp of acceleration, organic expansion getting costly and time-
consuming and complementary market reach offered by JP’s portfolio of 12 plants to its
existing asset base creates strong strategic sense. Shareholder value may decrease in
the short term due to reduced EPS and increased debt equity ratio. However, over the
long term the company may reap the positive effects of leverage.

Barring the increase in its debt and some dilution in earnings, UT appears to have netted
a good catch in JP’s cement assets.

(Note: The figures above are calculated based on the operating capacity of 18.4
MTPA)

Amidst rising NPAs and CDRs, this one is a classic example of deals driven by bankers
forcing companies to deleverage the balance sheet by sale of stressed assets

Jaiprakash Associates Ltd: The target

Noida-based Jaiprakash Associates Ltd. has a total cement capacity of 27.79 MTPA as
on 31st March 2015.

After several failed attempts by JP to sell its cement business in the last two years, the
lenders prevailed upon the company to sell a lion’s share of its portfolio in one shot.

Rationale for JP
1. Outstanding debts and interest-If JP manages to sell the cement assets as per
plan and utilise the proceeds fully for repayment, it would be able to prune its debt
from Rs 24,126 crore as of March 31, 2015, to about Rs 7,000 crore. It can also
renegotiate the terms and conditions of existing and proposed loans and
advances.

2. Market value and piling losses- A huge debt pile have ensured that JP trades as
a penny stock. As of 26th February 2016, it had a market value of just Rs 1,637
crore (Rs 6.73/share). All the cement companies and divisions of JP group are in
losses eroding the net worth of the company.

3. Refinance- If MMRD Act gets the nod, the deal may also include a clause that UT
will refinance JP’s borrowings at lower rates. This will bring down the future interest
obligations of the company.

4. Core concentration– JP Group is determined to leverage its expertise in the fields

of engineering & construction, real estate and project execution, in a committed
manner and such steps would further ‘cement’ its credentials of being a trustworthy
organisation in the long run.
The bad for JP
1. JP will lose its cement business which has been generating substantial cash flows.
2. Pressure from the bankers and comparison to its earlier transaction with UT as
well as comparable indicate that the deal was slightly less favourable to JP.

Shareholders value is currently less and may reduce further immediately after the sale
but it may gradually rise in the long term due to concentration on core businesses and
deleverage.

Conclusion
The deal will help UT to accelerate its position further in Indian and global markets and
will ease off pressure on JP from the stakeholders and let it concentrate on other core
businesses.

JP may also transfer some of their debt to Ultra-Tech which means that lenders now have
exposure to a business group that’s regarded as being financially sounder than many
others, thereby reducing the risk of defaults and also improving its capital adequacy ratio.

The proposed amendment regarding transfer provisions in MMDR Act will also allow
mergers and acquisitions of companies. It will also help improve profitability and decrease
costs of those firms that are dependent on the supply of mineral ore from captive leases.

The transaction also highlights the growing trend of lenders putting pressure on debt-
laden business houses to sell assets and deleverage the balance sheet. Due to rising
non-performing assets in the banking sector, it is a purely buyers’ market where the seller
does not have much choice other than agreeing on the term sheet offered by the buyers.

INVESTMENT SCENARIO:

Ultratech plans to build a new plant with capacity of 3.5 million tonnes per annum at Dhar in Madhya
Pradesh with an investment of US$ 400 million. The plant is expected to start commercial production by
2019.  The company is planning to build a US$ 287 million plant in Rajasthan. The plant will have a
capacity of 3.5 million tonnes per annum and is expected to commence operations by June 2020.
ULTRATECH CEMENT:

 Ultratech is the largest cement player in India and fifth largest globally.

 It is India's largest exporter of cement meeting demands in countries across the Indian Ocean, Africa,
Europe & Middle East

 Its operations span across India, UAE, Bahrain, Bangladesh and Sri Lanka

 It has 18 integrated plants, 1 white cement plant, 1 clinkerisation plant, 2 WallCare putty plants, 25
grinding units, 7 bulk terminals & 101 Ready Mix Concrete (RMC) plants.

 Projects: Mumbai Metro, Bangalore Metro Rail, Kolkata Metro Rail, Monorail, Coastal Gujarat Power

 During FY 2016-17, the company reported EBITDA of US$ 873 million.

ULTRATECH CEMENT: MILESTONES: