Bags of general purpose, right, and Mastercrete, left, building cement, manufactured by Lafarge SA (Photographer: Chris Ratcliffe/Bloomberg)

Shree Cement Tries To Allay Analysts’ Concerns On Its UAE Buyout

Analysts don’t expect Shree Cement Ltd. to gain much from its acquisition of Union Cement in the United Arab Emirates even as the company said the deal brought the highest profit-making cement maker in the Gulf into its fold.

Going by the history of Indian companies venturing into the Middle East, the deal doesn’t seem to be as promising, Kotak Securities said in a note. Edelweiss said called the buyout “insipid” despite lucrative valuations.

While the company accepted that the UAE market is regulated and power and fuel costs were higher, it exuded confidence in improving the operational performance. “Healthy operating margin of 22 percent makes Union Cement a good acquisition. It’s the highest profit-making company in the Gulf region,” HM Bangur, managing director at Shree Cement, told BloombergQuint.

Shree Cement agreed to acquire the four-million-tonnes-a-year company for an enterprise value of $305 million or Rs 1,950 crore ($76 a tonne). The acquisition, expected to be completed in nine months, will help Shree Cement—with a capacity of 12 MTPA—expand its footprint outside India.

How Good Are The Valuations

The enterprise value of $76 a tonne appears lower than $84 a tonne that UltraTech Cement incurred in 2010 while acquiring the 3.2 MTPA Dubai-based ETA Star Cement for $269 million (Rs 1,700 crore). That’s also lower than $95 a tonne Shree Cement will spend to expand capacity by 3 MTPA at its Karnataka plant.

While the implied $76 a tonne enterprise value appears lucrative, Union Cement is likely to generate a low return on equity of about 6-7 percent at its current margin of around 22 percent, Edelweiss said. The brokerage sees no merit in the acquisition at such margins.

Analysts are also concerned about what they called lack of clarity. At a cursory glance, a capex outlay of less than $120 a tonne—the prevailing greenfield expansion rate—may look attractive, said Rohit Natarajan, analyst for institutional equities at IDBI Capital, said. A closer look at steady-state Ebitda per tonne could allay concerns but it’s unknown as of now, he said.

Bangur said the company could increase Union Cement’s Ebitda margin from 22 percent by cutting energy consumption costs and increasing output at Union Cement.

Domestic Capex Plan Behind Schedule

Kotak Securities, which has a ‘Sell’ rating on Shree Cement, said its domestic capacity addition appears to be lagging. The company plans to commission over 12 MTPA of cement capacities by the year ending March 2020.

It has so far commissioned 2 MTPA by removing bottlenecks at existing plants, and is looking to commission another 3 MTPA capacity in Karnataka by the year ended March 2019. The modest delivery record raises a serious doubt about its expansion plan, Kotak Securities said.

Bangur admitted that there could be a delay of a year in expanding the domestic capacity, largely because of slower progress in Jharkhand. The company is, however, confident it will 40 MTPA by March 2020 through a mix of organic and inorganic growth, he said. Projects in Bihar (3MTPA), Suratgarh, Rajasthan (2MTPA) and Karnataka (3MTPA) are on track.