Brokerages positive on Ultratech’s acquisition of Kesoram’s cement unit

UltraTech Cement, India’s largest cement maker, announced on Thursday its board’s approval of a scheme to acquire Kesoram Industries’ cement business in an all-stock deal.

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Kesoram Industries‘ shares surged for the fifth consecutive session, hitting the 5 percent upper circuit on December 1, while Ultratech Cement Ltd saw its fourth consecutive session of gains, rising by 1 percent. Kesoram soared by over 100 percent in the last five sessions, while Ultratech surged by 5 percent in the last four sessions. Year-to-date, both stocks have seen significant advances, with Kesoram rising by 132 percent and Ultratech by 30 percent.

UltraTech Cement, India’s largest cement maker, announced on Thursday its board’s approval of a scheme to acquire Kesoram Industries’ cement business in an all-stock deal. This move will boost UltraTech’s production capacity and expand its presence in the rapidly growing western and southern markets.

Kesoram Industries, part of the BK Birla Group, plans to demerge its cement business, including two integrated units in Karnataka and Telangana with a combined capacity of 10.75 million tonnes per year. The business, sold under the brand Birla Shakti Cement, will be merged into UltraTech Cement, the flagship company of the Aditya Birla Group led by Kumar Mangalam Birla. The deal’s gross enterprise value is estimated to exceed Rs 7,600 crore, as per various news reports.

Multiple brokerages have expressed positivity towards this deal. Analysts view the potential acquisition of Kesoram’s cement business positively, expecting it to facilitate industry consolidation and enhance Ultratech’s capacity share. This move is projected to bolster the company’s position in the southern and Maharashtra markets. Ultratech has a track record of effectively integrating acquired assets, generating synergies in manufacturing, logistics, and distribution networks, resulting in improved profitability for acquired assets, analysts added.

Jefferies India suggests that the acquisition will bolster Ultratech Cement’s leading position in the Indian cement industry. Despite a slightly high valuation compared to recent acquisitions, Kesoram’s operational unit, improved access to working capital, Ultratech’s premium pricing, enhanced product mix, efficient capital expenditure, synergies with neighboring plants, particularly Rajashree, are expected to elevate Kesoram’s unit profitability.

Motilal Oswal Securities estimates the enterprise value of this deal to be around Rs 7780 crore, involving an equity issuance of Rs5380 crore (1 equity share of Ultratech Cement for 52 equity shares of Kesoram). With Kesoram’s net debt at Rs1660 crore as of Sep 2023, it’s assumed to rise to Rs 2400 crore at the deal’s completion due to accumulated losses, contingent liabilities, and a higher amount paid for preference shares. Consequently, this will result in a 2.1% equity dilution for Ultratech.

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