UltraTech Cement Ltd. acquisition of J K

Lakshmi Cement Ltd

INDIAN CEMENT INDUSTRYOverview

•A Kolkata based company started manufacturing cement in 1889.

•In 1914, Indian Cement Company Ltd was established in Porbandar.

•In 1927, Concrete Association of India was set up to create public awareness on the utility of cement.

•In 1956, price and distribution system of cement industry came under government control.

•After the economic reform in 1980’s the government control on cement industry was liberalized.

•A great increase in demand of cement, has resulted India to become 2nd largest cement producer in the world after China.

EVOLUTION OF INDIAN CEMENT INDUSTRY

Company Production* Installed Capacity*

ACC 17,902 18,640Ambuja 15,094 14,860Ultratech 13,707 17,000Grasim 14,649 14,115India Cements 8,434 8,810JK Group 6,174 6,680Jaypee Group 6,316 6,531Century 6,636 6,300Madras Cements 4,550 5,470Birla Corp. 5,150 5,113

*in Million Tonnes

(Source:Mapsofindia.com 2010, Tradechakra 2008)

MAJOR PLAYERS IN THE INDIAN CEMENT INDUSTRY

•High Transportation Cost is affecting the competitiveness of the cement industry. Freight accounts for 17% of the production cost. Road is the preferred mode for transportation for distances less than 250km. However, industry is heavily dependant on roads for longer distances too as the railway infrastructure is not adequate.

•Cement industry is highly capital intensive industry and nearly 55-60% of the inputs are controlled by the government.

•There is regional imbalance in the distribution of cement industry. Limestone availability in pockets has led to uneven capacity additions.

•Coal availability and quality is also affecting the production

ISSUES CONCERNING THE CEMENT INDUSTRY

GOVERNMENT: From the era of direct government control over cement production and distribution to today’s globalization of Indian cement industry, Government of India has always been one of its major drivers of change. Tax concession, Tax rebate, etc. to new foreign players have changed the entire cement business in India. With multinational cement players coming in, the cement quality and standards have improved a lot. REAL ESTATE: The boom in the cement industry in India came in 2003, when the real estate rates started rising. Over the past few years (FY03-07), cement demand has grown at a CAGR of 8.37% which is higher than the CAGR of supply at 4.84%. Real estate sector is the key driver and accounted for almost 55% of cement demand in FY 07. INFRASTRUCTURE: In this FY10 budget, the Government will be spending Rs. 1.73 trillions on infrastructure. With many international events like Commonwealth games 2010, Hockey World Cup 2010, Cricket World Cup 2011 etc, the need to develop world class infrastructure was felt in early 2000’s. As a result, many new multi billion dollars project were sanctioned to develop roads, metros, airports, railway stations etc all across the country, thus, boosting the demand for cement.

STRUCTURAL DRIVERS OF THE INDUSTRY

•Coal rates, power tariffs, railway freight plays a very important factor in the price determination, interestingly, government control all of these prices

•Govt is one of the biggest consumers of the cement

POLITICAL

•Future of cement industry is very strong•A lot government infrastructure and housing projects are under construction

ECONOMIC

•Indian consumers prefer buying branded cement like LAFARGE, JAYPEE,BIRLA etc

•Industry will create 25 lakhs jobs in coming years

SOCIAL

•Govt is acquiring new technology from Japan •Emphasis is on creating highly energy efficient and environment friendly technology to produce cementTECHNOLOGY

PEST ANALYSIS

Industry competit

ion –HIGH

Bargaining power of

customers - LOW

Threat of substitutes -

LOW

Bargaining power of

suppliers - MODERAT

E

Barriers to entry –LOW

PORTER’S FIVEFORCES

Company Background

HISTORY - ULTRATECH CEMENT

• First cement unit was set up at Porbandar in 1914 with capacity of 1,000 tones per annum

• The Aditya Birla Group is the 10th largest cement producer in the world & the 4th largest in Asia

• UltraTech Cement Limited It is India's 2nd biggest cement company and India’s largest exporter of cement clinker based in Mumbai, India

• O P Puranmalka is the present director of Ultratech Cement

• The revenue of the organization in 2010-2011 was 13,496.58 crores and profit was 1,404.23 crores

• It was incorporated on 24 August 2000 as L&T cement Limited. Cement business of Larson & Turbo Limited demerged & vested in company in 2004.

PRESENT• Grasim acquired management control in July 2004

• The name changed to Ultratech Cement limited with effect from 14 October 2004

• UltraTech Cement Limited has 12 integrated plants, 1 white cement plant , 1 clinkerization plant in UAE ,15 grinding units( 11 in India, 2 in UAE, 1 each in Bahrain and Bangladesh)and 6 bulk terminals (5 in India and 1 in Sri Lanka)

• There is a grinding unit present in our state and is present in Jharsuguda since 1993

• UltraTech Cement Limited has an annual capacity of 52 million tonnes

• UltraTech's subsidiaries are Dakshin Cements Limited, Harish Cements Limited, UltraTech Ceylinco (P) Limited and UltraTech Cement Middle East Investments Limited

• Major competitors: Ambuja Cement, ACC Cement & Shree Cement

PRODUCTS OFFERED It manufactures and markets ordinary Portland

cement, Portland blast furnace slag cement, white cement and Portland Pozzolana cement. It also manufactures ready-mix concrete (RMC) and Autoclaved Aerated Concrete Blocks(AAC Blocks) with brand name Ultratech

Ordinarily Portland Cement*Clinker 90.50%*Gypsum 4.00%*Fly ash 5.50%

2.Portland Blast Furnace Slug Cement *Clinker 70% *Gypsum 6% *Slag 24% 3.Portland Pozzolana Cement *Clinker 66% *Gypsum 4% *Fly ash 30%

MISSON & VISION

MISSIONTo deliver superior value to customers,

shareholders employees & society at largeVISION • Customization, Employee empowerment• Quality consistency• Product range& Cost competitiveness

STRATEGIES

The strategies applied by Ultratech cement are:

• Cost efficiency• Customer retention• Innovation strategies• Financial strategy• Business redefinition

FUTURE PLANS FOR GROWTH

• Aspire to become the top manufacturers in cement and concrete industry.

• To become the leaders in the cement market.

• Plans to bring in value added programs & service for construction industry.

HISTORY: JK LAKSHMI CEMENT

• Launched in 1982

• One of the most preferred brands in its marketing area with a network of about 3000+ dealers spread in the states of Rajasthan, Gujarat, Delhi, Haryana, Uttar Pradesh, Uttarakhand. Punjab, Jammu & Kashmir, Maharashtra, Madhya Pradesh, Chhattisgarh, Odisha & West Bengal

• Annual installed plant capacity was 3.4 million tonnes per annum in 2007, but was being expanded to 5 million tonnes per annum during 2008

PRESENT• Member of the JK Organisation, it is a blue chip cement company

operating in India

• Built over an area of about 8 square kilometers at Jakaypuram in theSirohi District of Rajasthan

• It is a public company listed on the Bombay Stock Exchange

• It acquired the ultra modern equipment from Fuller International of the United States of America, and electronic packers from Ventomatic in Italy

• In January,2015 one more unit at Durg, Chhattisgarh came into operations with a capacity of 10 million tonnes per annum

PRODUCTS OFFERED• JK Lakshmi Pro+ Cement• JK Lakshmi Cement

• PPC (Blended)• 53 Grade OPC• 43 Grade OPC

• JK Lakshmi PowerMix (Concrete)

• JK Lakshmiplast (Plaster of Paris)

• JK Gypgold (Gypsum based plaster)

MISSON & VISIONVISION

To be A Profitably growing Innovative and Caring Company, to become a significant player in operating market and amongst the Top Ten in Indian cement market

MISSION• Double Sales and Profit (PBIDT) in 4 years• Achieve Operational Excellence• Create superior value for customer through Premium Products &

Brand Positioning• Be a workplace of choice-Attract, Retain and grow Talent Pool of

change leaders• Continuously enhance shareholders’ wealth and be a preferred

portfolio among investors• Socially Responsible Corporate Citizen

STRATEGIES • Effective people policies and practices that

deliver the strategy across businesses• Enhancement of Shareholders’ Wealth• An HR function that can implement policy and

strategy, and can influence the business• Innovations for greater productivity &

efficiency• Taking steps towards reducing carbon

footprints

RATIONALE

RATIONALE FOR ACQUISITIONThe cement industry is characterized by consolidation with major players acquiring smaller firms to maintain their position in the market. The rationale for Ultratech cement for the acquisition of JK Lakshmi cement are the following:• Operating synergy – JK Lakshmi cement has a major portion of its expenditures on raw materials whereas that for Ultratech is lesser. Hence, Ultratech’s acquisition would decrease the operating cost. Y2

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• Moreover, Ultratech would benefit from the distribution network of JK Lakshmi cement as there eastern part of the country is a potential goldmine in terms of the construction industry and JK Lakshmi has lower S&D cost.

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• Cost of greenfield project has risen 33.33% in two years from USD$120 per tonne in FY-12 to USD$160 per tonne in FY-14. If Ultratech acquires JK Lakshmi cement it would not have to spend such an amount to setup greenfield project to retain its market share. • Capacity Utilization – JK lakshmi cement has consistently been higher in capacity utilization as compared to Ultratech however Ultratech has been higher in operating margin. It is illustrated as:

CAPACITY UTILIZATION

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OPERATING MARGIN

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OM-UOM-JKLOM-I

VALUATION

VALUATION - ChoiceThe valuation method chosen to value JK Lakshmi cement are the following:• Industry specific benchmark multiples method• Replacement cost or cost of setting up a greenfield plantWhy not DCF valuation – JK Lakshmi cement has been a consistently growing company with major capital expenditure over the years. Recently it has commissioned its cement plant in the Durg region of Chhattisgarh, Madhya Pradesh with an annual capacity of 2.7 Mt per annum which would take its total installed capacity to 9.3 Mt per annum. The limitations are:• Earnings growth rate cannot be estimated or used in valuation• Tax computation becomes complex• The going concern assumption may not apply

• INDUSTRY SPECIFIC VALUATION MULTIPLE: Factors that influence EBITDA multiples:

• Industry growth prospects• Risk vs return• The size of the business and the level of EBITDA itself

plays a huge part in selecting an EBITDA multiple, with the general perception that investments in larger businesses have less risk

• The current economic climate, including the availability of financing, can have a considerable effect on EBITDA multiples, which will increase in a positive economic environment with low interest rates

•  Businesses that require a lot of working capital or significant investments in capital expenditures will earn lower EBITDA multiples

Keeping the above factors the EBITDA multiple for the construction industry is taken as:

Industry $ 0 - $ 1 M $ 1 - $ 5 $ 5 - $ 10Construction

& engineering4.5 5.5 6.5

• REPLACEMENT COST Considered the market perceived current per tonne benchmark cost of setting up a greenfield project. The same is reported to be in the range of USD $120 – USD $ 160.The current installed capacity of JK Lakshmi cement is 9.3 Mt per annum. So to acquire the entire business of the firm the price was fixed to be around7588.8 crore INR.

The current EBITDA of the company is 349.46 crores INR. Thus by applying the valuation multiple of Enterprise value (EV)/ EBITDA ( or the EBITDA multiple) JK Lakshmi cement can be valued at 2271.49 crores INR.

The value fixed is of the range – 2270 -7600 crore INR.

DEAL STRUCTURE

DEAL STRUCTURE  BALANCE SHEET DATA

ULTRATECH CEMENT

JK LAKSHMI CEMENT

ULTRATECH CEMENT/

Mar-15 Mar-15 JK LAKSHMI CEMENT

Current assets Rs m 87,975 7,725 1138.90%

Current liabilities Rs m 1,10,203 11,392 967.30%

Net working cap to sales % -9.1 -15.8 57.60%

Current ratio x 0.8 0.7 117.70%

Inventory Days Days 44 36 123.20%

Debtors Days Days 25 9 276.20%

Net fixed assets Rs m 2,45,398 30,878 794.70%

Share capital Rs m 2,744 589 466.30%

"Free" reserves Rs m 1,82,513 12,513 1458.60%

Source: Equity Master, Annual Reports, Return filings

DEAL STRUCTURENet worth Rs m 1,90,412 13,379 1423.30%

Long term debt Rs m 49,927 14,871 335.70%

Total assets Rs m 3,80,631 41,700 912.80%

Interest coverage x 6.1 2.8 216.40%

Debt to equity ratio x 0.3 1.1 23.60%

Sales to assets ratio x 0.6 0.6 115.20%

Return on assets % 7.1 4.7 149.00%

Return on equity % 11 7.7 143.20%

Return on capital % 14.8 7.1 208.20%

Exports to sales % 1.2 0 -

Imports to sales % 2.7 5.7 46.40%

Exports (fob) Rs m 3,014 NA -

Source: Equity Master, Annual Reports, Return filings

DEAL STRUCTUREFinancial Ratio1. Beta 0.9482. Cost of Equity: 12.26 3. Return on Equity: 11

JK Lakshmi has been valued at 2771.49 crores INR

As on March ‘16, Ultratech has 1,82,613 crores INR

Recommendation: To offer all cash deal to buy the JK Lakshmi

POST DEAL STRUCURE

Post Acquisition• The merged entity will be the top player in the Indian

Cement industry• UltraTech will acquire a number of government

contracts• Control of 3000+ dealer network will be a huge bonus• JK’s modern equipment and established facilities will

give additional 5-10 million tonne capacity• Additional products like plaster of paris and OPC grade

cement will be acquired

BEFORE….

AFTER….

Post Acquisition - Steps• Retain the brand name of JK cements as a subsidiary• Transfer its own operations in white cement to JK, which

is already a market leader in it, with modern equipment and facilities

• Focus on its cement, RMC and AAC as its core offerings• Acquire more government contracts to strengthen its

hold• A more efficient utilization of its installed capacity of 17

mn tonnes

Post Acquisition - Results

• Cost competitiveness – by learning from operations and practices of JK

• More job creation equals government support equals ease of obtaining government contracts

• A wide portfolio of product offerings – market leader in India

• Acquisition of a blue chip stock traded company will enhance its own share prices