Fitch assigns ‘Neutral’ rating to UltraTech post stake buy in India Cements

UltraTech Cement’s planned acquisition of a 23% stake in India Cements Limited (ICL) by July 2024 for cash of about ₹1,900 crore is ‘neutral’ for its credit metrics, says Fitch Ratings in a note. The global brokerage house expects UltraTech’s EBITDA net leverage to remain below 1.0x over the next few years, factoring in the acquisition. This will support solid rating headroom, relative to the threshold of 2.5x, above which the agency may take negative rating action, it says.

According to Fitch, UltraTech’s EBITDA net leverage would remain comfortably below 2.5x, even if it chooses to acquire a controlling stake, or the entire remaining 77% stake at a similar valuation in the future.

On June 27, UltraTech Cement, a part of Aditya Birla Group, announced to buy a 23% stake in Chennai-based ICL, which will be second to the N Srinivasan (managing director and CEO)-led promoter entity holding of 28.4%. The timeline for completion of this deal is one month, while there is no indication of acquisition for controlling stake in ICL.

As per the latest exchange data, Ultratech on June 27 acquired around 6.91 crore shares, or about 24% stake, in ICL after ace investor Radhakishan Damani and his related entities sold stakes via block deals yesterday. The shares were sold at an average price of ₹277 apiece, amounting to ₹1,914 crore.

“We estimate that the purchase price, along with ICL’s debt as of the financial year ending March 2024 (FY24), implies an enterprise value/tonne valuation of $85. This remains below some recent transactions in India, although UltraTech may need to make additional investments in the assets to improve their performance, should it gain control,” the global agency says in its report.

The report notes that the transaction was in line with UltraTech’s recent strategy of augmenting its presence in the under-represented south India region. The majority of ICL’s operations are located in south Indian states of Tamil Nadu, Telangana and Andhra Pradesh. This is similar to Kesoram Industries, which UltraTech had proposed to acquire initially in November 2023, and is awaiting regulatory approvals, it adds.

The report further highlights that ICL’s asset utilisation rate of 61% is below UltraTech’s 85%. UltraTech has a strong record of turning around weak assets, which, according to Fitch, supports its ability to improve the target’s utilisation and profitability, and mitigates integration risks. “UltraTech increased capacity by over 40 million tonnes per annum (mtpa) through acquisitions in 2017-2019, and improved utilisation to over 70% from sub-par levels at some of the underperforming assets within the first year of the acquisition. This also mitigates risks for similar transactions in the future, although a material debt-funded acquisition could reduce rating headroom.”

Fitch expects consolidation in India’s cement industry to continue in the medium term, as top industry players look to maintain or improve their market shares while investing in capacity expansion to tap India’s long-term demand growth potential. UltraTech’s announcement follows a similar one by a company under India’s second-largest cement producer, the Adani Group, to acquire Penna Cement Industries Limited in south India, earlier this month.