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Business News/ Market / Mark-to-market/  What does UltraTech-Jaiprakash Associates deal mean for investors?
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What does UltraTech-Jaiprakash Associates deal mean for investors?

Investors are excited probably because this deal is finally through and that they now know that bankers will keep up the pressure on Jaypee Group

Post acquisition of this cement capacity of 21 million tonnes per annum (mtpa), UltraTech will continue its leadership of the country’s cement sector, with a capacity of around 91 mtpa (including overseas capacity). Photo: Pradeep Gaur/MintPremium
Post acquisition of this cement capacity of 21 million tonnes per annum (mtpa), UltraTech will continue its leadership of the country’s cement sector, with a capacity of around 91 mtpa (including overseas capacity). Photo: Pradeep Gaur/Mint

On Tuesday, three Jaypee group stocks took the Street by surprise. Jaiprakash Associates Ltd jumped by 27.97% in intraday trading, reacting to news that the sale of its cement business to Aditya Birla Group-owned UltraTech Cement Ltd has finally been approved by the companies’ boards. Even group firms Jaypee Infratech Ltd and Jaiprakash Power Ventures Ltd surged by 15.85% and 10.37%, respectively.

But what was the new trigger, given that this deal was first announced almost three months ago? After all, the additional sum of 289 crore that JP Associates appears to have wangled from UltraTech Cement is less than 2% of the total cost of acquisition of 16,189 crore.

The excitement is probably because a) this deal is finally through and b) investors now know that bankers will keep up the pressure on the company

About 12,000 crore of debt will be cleared from the books of JP Associates. This raises hopes for other Jaypee group firms too that are faced with debt burdens, thus explaining the euphoric rise in their stock prices.

Bankers, the biggest victims so far, will finally get succour as their loans to the Jaypee group are at least partially repaid. As on 31 March, the group had a consolidated debt of around 89,000 crore.

What’s in it for UltraTech Cement? The name of the game for it is to remain No. 1 in the industry and stay steadfast on the path of growth. Post acquisition of this cement capacity of 21 million tonnes per annum (mtpa), UltraTech will continue its leadership of the country’s cement sector, with a capacity of around 91 mtpa (including overseas capacity). LafargeHolcim-owned ACC Ltd remains a distant second, with a capacity of about 31.5 mtpa.

However, given that the acquired cement units of JP Associates come with some liabilities too, restructuring them and bringing them on the road to profitability is likely to take time. Until then, upsides for UltraTech Cement shares would be capped. This explains why the stock trended lower (down 1.16%) on Tuesday, amid all the buzz in Jaypee group shares.

That said, from UltraTech Cement’s perspective, analysts reckon that the timing was right and the deal was reasonably priced—at an enterprise value of about $117 per tonne. Compare this to the bids offered for Lafarge India’s cement business, which work out to $125 per tonne.

Also Read: Jaypee salvages UltraTech cement deal, loses control of Jaiprakash Associates

Further, the cement cycle is just about turning after hitting a trough. Realization per tonne of cement sold is also better than three months ago.

A good monsoon, revival of infrastructure projects and a housing boost are likely to see the cement sector improve. Obviously, UltraTech Cement investors may experience some short-term pain as analysts forecast an earnings contraction for a few quarters, until the JP Associates cement units are turned into productive assets.

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Published: 06 Jul 2016, 12:36 AM IST
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