UltraTech to buy Star Cement; net falls 26% in Q4

UltraTech to buy Star Cement; net falls 26% in Q4

Mumbai: UltraTech Cement Ltd, owned by the $24.5 billion (Rs1.09 trillion) conglomerate Aditya Birla Group, said on Thursday that it will acquire Dubai-based ETA Star Cement Co. Llc as Mint had reported on 28 April.

The purchase will be made through the United Arab Emirates (UAE)-based subsidiary UltraTech Cement Middle East Investments Ltd for an enterprise value of Rs1,700 crore. Enterprise value is the market value of the entire business, including all its debt.

Star Cement, a part of ETA Star Group—one of Dubai’s largest conglomerates that has interests in real estate development to trading—has a capacity of 2.3 million tonnes (mt) through two plants in the UAE along with 0.4 mt in Bahrain and 0.5 mt in Bangladesh. The acquisition will be completed by the end of June, UltraTech said in a statement.

The Aditya Birla Group, which has interests ranging from metals to mobile services, said it will acquire “management control and equity stake", but did not disclose the size of the stake or the amount it paid for it.

O.P. Puranmalka, whole-time director of UltraTech Cement, said the acquisition will give the company “immediate scale and footprint in the Indian Ocean rim without disturbing the market matrix".

The firm did not specify where the money will come from.

“We will use a judicious mix of internal accrual and borrowings for funding this acquisition," said K.C. Birla, chief financial officer at UltraTech Cement.

At the end of March, UltraTech Cement had cash and bank balances of Rs83.73 crore, with loans and advances of Rs351.13 crore, the company’s results, also released on Thursday, showed.

The company reported that profit for the quarter ended March fell 26% to Rs229 crore from Rs309 crore in the corresponding quarter of the previous year, dragging the stock down.

UltraTech shares shed 5.19% on the Bombay Stock Exchange to end at Rs1,018 each, compared with a marginal 0.71% gain by the exchange’s benchmark 30-share Sensex index, which started to climb out of a two-day slump to close at 17,503.47.

UltraTech currently exports cement and clinker to West Asia, and with this acquisition, “it will gain direct access to markets in the Middle East and adjoining regions", the company said in a media statement.

It will get a 20% market share in the UAE market, said Jagdish Bajaj, president (finance) of UltraTech.

Crunching the numbers, Rajan Kumar, equity analyst with Centrum Broking Pvt. Ltd, said the acquisition cost the Aditya Birla Group around $125 per tonne of cement.

“The price is neither expensive nor cheap because the Middle East market is going through a slump and traditionally it is always good to enter a new market when it is not doing that well," he said.

Kumar said that selling finished cement in the UAE will improve the company’s prospects in the years to come.

The Aditya Birla Group is currently awaiting approval from the Bombay high court to merge its other cement company Samruddhi Cement Ltd—which was first demerged from Grasim Industries Ltd—with UltraTech.

“This acquisition together with the Samruddhi amalgamation will enhance UltraTech’s capacity to 52 million tonnes per annum," said Puranmalka, who took over as whole-time director on 1 April.

Meanwhile, reacting to its financial performance, the company on Thursday blamed the lower profit to a drop in realizations in both domestic as well as export markets. Analysts put the realization at Rs3,000 per tonne, down from Rs3,260 per tonne in the same period last year.

“The results pulled down the stock today. The domestic cement outlook is weak and with costs like coal likely to rise, the stock may remain subdued at around Rs950-1,025 per share. The acquisition?will?only?reflect in the long term," an analyst from a private brokerage said on condition of anonymity.