What Brokerages Made Of Dalmia Bharat's Jaypee Cement Acquisition
The Jaypee Group, formally known as Jaiprakash Associates Ltd., will sell its clinker, cement and power plants to Dalmia Bharat.
Dalmia Bharat Ltd. entered into agreements on Monday to acquire the cement and power assets of the Jaypee Group for a total of Rs 5,666 crore.
The Jaypee Group, formally known as Jaiprakash Associates Ltd., will sell its clinker, cement, and power plants to the Dalmia Bharat Group, which amount to a cement capacity of 9.4 million ton, a clinker capacity of 6.7 million ton and thermal power plants of 280 megawatts.
"The acquisition will enable Dalmia to expand its footprint into the central region and will represent a significant step towards realisation of its vision to emerge as a pan-India cement company with a capacity of 75 million ton by FY27 and 110‐130 million ton by FY31," it said.
It also bought the Jaypee Nigrie Cement Grinding Unit for Rs 250 crore.
Here's what brokerages make of Dalmia Bharat's acquisitions:
Morgan Stanley
Maintains an 'overweight' rating with a target price of Rs 1,900 apiece.
The Jaiprakash assets are situated in Madhya Pradesh, Uttar Pradesh and Chhattisgarh, and hence help diversify Dalmia’s geographical footprint, which is mainly in the east and south regions currently.
Including the Jaiprakash assets, Dalmia’s potential capacity would be around 58.5 million ton by FY24 (around 9% market share).
In terms of deal value, the proposed amount implies an enterprise value of Rs 6,000/ton (of grinding capacity) versus average deal values of Rs 6,500 over the past few years (excluding Adani's acquisition of stakes in ACC and Ambuja Cements from Holcim earlier this year).
Await details from management on potential acquisition timelines, funding of this acquisition, and potential synergies.
Motilal Oswal
Maintains an 'overweight' rating with a target price of Rs 1,900, implying an upside of 5%.
Central India has one of the lowest per capita cement consumption at 170 kilogram versus an industry average of 250 kg in the entire country. Central India's cement demand (about 54 million ton) represents 15% of the country’s total cement demand.
Post completion of the ongoing expansions and acquisitions, Dalmia Bharat's grinding capacity will increase to 59 million ton per annum by FY24, making it the third largest player in the country, based on the expansion plans announced by the industry players.
Dalmia Bharat continues to be cautious about leveraging its balance sheet and targets to maintain net debt to Ebitda below 2x. However, the management believes that in case of a strategic acquisition, net debt to Ebitda may exceed 2x for a short period.
Emkay Research
Maintains a 'hold' rating with a target price of Rs 1,600, implying a downside of 16.1%.
It will be difficult to predict the timeline for the closure of the deal.
The acquisition will also increase visibility on volume growth/market share gains, enable Dalmia Bharat to diversify its regional presence, and reduce earnings volatility.
Post-acquisition, Dalmia's capacity mix will be more diversified, with 52% in the East, 26% in the South, 16% in the Central region, and 6% in the West, versus 59% in the East, 33% in the South, and 8% in the West currently. Besides, any consolidation in the sector is positive for pricing discipline/ improvement, and long-term returns.
From a demand-supply standpoint, the central region is a favourable market because it has higher utilisation (75%) than the rest of India (70%).
At an enterprise value of Rs 5,700 crore, the transaction is likely to be 30–40% below replacement cost, owing to vintage assets, a lack of interest from peers, and the likely need for additional capex to run the operations.
We have yet to factor the transaction into our estimates because we are awaiting clarity on the plant-by-plant break-up of the acquired assets, the availability of limestone reserves, the option for capacity expansion, additional/maintenance capex required to run operations, funding break-up, and deal closure timelines.
Jefferies
Maintains a 'buy' rating with a target price of Rs 2,060, implying an upside of 12%.
The incremental capex required to rev up the plants to efficient levels isn't clear from the announcement.
The captive power capacity to be acquired (under the framework agreement) is nearly double the requirement for the acquired clinker/cement capacity.
Key questions to the company: The timeline for completion of acquisition; exclusivity period; current capacity utilisation of Jaypee plants; additional capex requirement to make inoperative capacity usable, if any, and timelines; brand launching costs for Dalmia in the central region; limestone reserves, expansion possibilities and when limestone licenses are due for renewal.