India Cements acquisition: Emkay says buy UltraTech Cement stock, shares target price

The board of UltraTech Cement Ltd has approved the acquisition of 33 per cent additional stake in India Cements Ltd from its promoters & associates at Rs 390 per share at an enterprise value (EV) of $121 per tonne and an outflow of Rs 1,900 crore, subject to regulatory approvals. The move is seen helping the cement maker achieve industry-leading volume growth. It may lower UltraTech's capex and boost return ratios, said Emkay Global.

To recall, UltraTech Cement acquired 23 per cent stake in India Cements in June and its total stake in the target company has increased to 56 per cent at an EV of $108 per tonne. UltraTech Cement has made an open offer for 26 per cent equity stake at Rs 390 per share. Emkay Global believes UltraTech Cement is significantly strengthening its position, as it sees the cement maker's capacity market share to more than double in the South, to 25 per cent by FY27E.

"UltraTech India's grey cement capacity is likely to cross 200 mt by FY27E (12 per cent CAGR). This will help the company achieve industry-leading volume growth, despite its large scale, and the lower opex/capex would boost return ratios. The industry profitability could remain capped in the near term, in our view, owing to fight for market share; we expect this to continue for another 4-6 quarters," it said.

The consolidation will help inject price discipline and is likely to generate significantly better profitability and return ratios in the longer term, Emkay said as it maintained its 'Buy' rating on the stock, and Jun-25 target price of Rs 12,800 per share, based on 20 times EV/E.

The potential acquisition candidate is also likely to see a further re-rating, Emkay Global said.

The profitability could remain capped in the near term, as companies may look to improve utilisation given acquired assets are operating at low utilisation levels, it said.