UltraTech Cement walks a long road with Jaiprakash Associates' assets

UltraTech has won the first half of the turnaround battle through a rise in volumes. The company now has to display price rationalisation
More than a year since the completion of its Rs 161.89-billion acquisition of Jaiprakash Associates’ cement — the largest–ever cement deal in India — UltraTech has won the first half of the turnaround battle through a rise in volumes. The second half would require the country’s largest cement maker to display price rationalisation.  

When the company took over about 21.2 million tonne capacity from Jaiprakash Associates in 2017, it was staring at a capacity utilisation of less than 15 per cent and a cost-structure that was not cash-positive. 

Back then, UltraTech had set a target to turn cash-positive in a year. The acquired assets were operating at more than 70 per cent utilisation in the quarter ended June 2018 and turned cash positive in the March 2018 quarter.

Analysts label it a turnaround story with right ingredients, including financial support, change in managerial role and larger focus on capturing a bigger chunk of the market. This surely may have led to some market disruption in the main market — Uttar Pradesh (UP). However, the expectation is UltraTech will return to focus on better pricing and cost efficiencies. 

“The company has injected the much-needed working capital, strengthened operations by upgrading technology and plant maintenance. This has resulted in improving efficiencies, enhancing capacity utilisation and bringing the cement manufactured at these plants up to your company’s standard,” said Kumar Mangalam Birla, chairman for Aditya Birla Group, while addressing shareholders at UltraTech’s annual general meeting (AGM) in July. 

Most of the acquired capacity went on-stream around the same time as Jaypee Group’s financial woes started, less than a decade back. Analysts add the cement capacity suffered lower utilisation due to need for working capital, lack of professional management and a weak branding. 

With UltraTech stepping in these issues have been addressed and there is more as well. On display were marketing skills, which led to competitive pricing in the past one year or so. “UltraTech had to be aggressive and there was a lot of market disruption in the UP market owing to that. They may have given up on price realisation in a bid to increase market share, as cement is an evacuation game,” said Nitin Bhasin, managing director and head of equities research, Institutional Equities, Ambit Capital. 

The company does not publicly disclose market share details, however certain analysts peg UltraTech’s current share in UP market at 30 per cent. “UltraTech’s brand commands a premium over others in several markets. What we saw over the past year is the company inclined towards gaining market shares in certain markets, which restricted price recovery despite favourable demand,” said Binod Modi, analyst at Reliance Securities.  

UltraTech has set yet another target for its acquired assets. It plans to achieve a breakeven at the profit before tax level for these acquired assets in the April-June 2019 quarter. This, analysts expect may change the game for the UP market once again. 

“Now, with the stabilisation of its new acquired capacity and sustainable utilisation over 80 per cent, it may focus on improving price realisation to achieve the PBT positive target,” Modi said. 

Certain others such as Bhasin from Ambit Capital expect the company to show price-rationale behaviour for more than one reason. 

“Ultratech with the Jaypee deal and the potential Binani acquisition will soon be sitting on a Rs 250-billion debt. With this kind of debt, Ultratech will need to eventually display a rational behaviour in terms of pricing; will it also look at an equity infusion, that is uncertain,” he said.

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