6 February 2016
Update | Sector: Cement
BSE SENSEX
24,617
S&P CNX
7,489
Birla Corporation
CMP: INR396
TP: INR500 (+26%)
Buy
BCORP to acquire Reliance Cement at US$135/t
Growth headroom and market consolidation at the cost of B/S comfort
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val (INR m)
Free float (%)
BCORP IN
77.0
30.9/0.5
544 /376
-10/0/-4
13
37.1
Post regulatory hurdle in Lafarge deal, BCORP entered into SPA for 5.5mt of Reliance
Cement at US$135/ton. Valuations at par zone with recent M&As.
Acquisition to aid new growth avenues to BCORP and consolidate its position in central
rd
India with 16% capacity mix (3 largest). Top 5 in central India now holds ~77% capacity.
However, BCORP’s B/S strength to hurt significantly along with likely dilution in EPS and
return ratios (ex-synergies). We await clarity on synergies, albeit proximity of plants
offer limited scope of logistics synergies.
We are yet to factor in the deal dynamics into our estimates till clarity emerges on
regulatory and financial aspects. Keep rating and estimates unaltered.
Financials & Valuation (INR b)
Y/E MAR
Sales
EBITDA
NP
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
EV/EBITDA (x)
EV/Ton (x)
2016E 2017E 2018E
32.2
2.3
1.0
13.6
-40.4
4.0
5.0
85.6
29.6
10.5
39
35.5
3.4
1.7
22.4
64.6
6.3
7.4
52.0
18.0
7.1
40
41.1
5.5
3.3
42.9
92.0
Underlying assets:
BCORP entered into SPA with R-Infra to buy integrated cement
capacity of 5.5mt (clinker 3.6mt) which comprising (1) 3mt integrated unit in Madhya
Pradesh (Maihar), (2) 2mt grinding unit in UP (Kundanganj), (3) 0.5mt grinding unit in
Maharashtra (Butibari). In addition to above assets, it includes (1) planned 5mt
cement plant in Maharashtra, (2) marketing arrangements for 0.3mt in W Bengal, (3)
coal mine of 5.7mt capacity and optimum manpower, efficient operating parameters
and technical capabilities. Given the transaction would be in the form of share sale
(not asset sale), no MMDR hurdle is expected.
342.7 353.5 384.8
Deal value at par with recent trends:
Deal value of INR48b implies US$135/ton (Gross
11.2
block ~INR30b). Reliance Cement Company Private Limited (RCCPL) has INR22.5-23b
12.0
debt, rest BCORP has to raise separately.
27.1
B/S to hurt meaningfully:
BCORP’s net cash of INR4.6b would rise to net debt of
~INR45b (net DER of 1.8x, net debt/EBITDA of 6.5x). Smooth financial closer would be
3.9
crucial. At 80% utilization, it needs INR1450-INR1500/ton EBITDA for PBT break-even.
9.4
36
EPS and ROCE dilutive in near-term:
Assuming utilizations of 70% and EBITDA of
INR900/ton in FY17 (INR800/ton in 3QFY16 including VAT incentives), it would add
EBITDA of INR3.5b and PBT of negative INR3b. Effectively, post deal, FY17E RoCE
would likely to dilute to ~5.8% (vs 7.5% pre deal).
Consolidate BCORP’s strategic position in central region:
Post deal, BCORP’s 9.3mt
capacity would reach 14.8mt. Its central India exposure would rise from 3.3mt (clinker
3.2mt) to 8.8mt (clinker 6.8mt) implying ~16% market share, 3rd largest post JPA and
UTCEM. It would help BCORP by (a) raising dispatch mix from 40% to 55-60% in central
India, and (b) offering much needed growth avenues (Lafarge deal got stuck in
regulatory hurdles). However, we expect limited logistics synergies due to close
proximity of BCORP and RCCPL plants. The deal would drive further consolidation with
capacity market share of top 5 companies in central region growing from 72% to 77%.
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Aashumi Mehta
(aashumi.mehta@motilaloswal.com); +91 22 3010 2397
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.