This story first appeared in DNA Money edition on Friday, August 31, 2012.
CRH Plc, an Ireland-based diversified group, foresees a 20% rise in cement prices in India in the next 2-3 years if its bid for Jaiprakash Associates’ Gujarat business is anything to go by.
The company is reportedly looking to pick up a 51% stake in Jaypee’s Gujarat operations for an enterprise value of Rs 4,200 crore, or $160 per tonne.
“For this investment to generate a return on capital employed of 16%, we believe CRH is possibly pinning hopes on cement prices moving up by another 15-20%,” said Chockalingam Narayanan, Manish Saxena, and Abhishek Puri, analysts at Deutsche Bank - markets research in their recent report.
Also, the deal, if it goes through at the touted valuations, could lead to re-rating of a number of midcaps, the analysts, who also see prices moving up in the same band, said.
The Gujarat operation under consideration consists of a 3.6 million tonne clinker plant at Kutch with a 2.4 million tonne of cement grinding capacity, and a grinding plant in eastern Gujarat with capacity of 2.4 million tonne per annum, CRH had said in a note without sharing any financial details.
Analysts, while awaiting deal closure, said the price increase could be a short-term phenomenon and may be restricted to the Gujarat market as the plants are located there.
Rikesh Parikh, vice-president - markets strategy and equities, Motilal Oswal Securities, said the stake sale to CRH will not make much difference as JP Associates is likely to continue managing the facility and control the production. “There won’t be a meaningful impact on the overall cement prices as the plant is based in Gujarat,” he said.
Also, for companies to plan their next leg of capital expenditure, the cement prices need to rise another 15%.
“Our demand-supply model suggests that sector upturn could drive cement prices over next 12-24 months on logistical constraints,” the Deutsche analysts said.
Analysts said CRH is a very system-driven operator and its investment at such a premium is a clear indication of its commitment to the cement sector in the country.
“Their entry will make a significant impact on the overall Gujarat market where pricing has been under pressure owing to fragmented market with no capacity addition other than the JPA facility. The Gujarat market has been performing well since a little over two years now as demand has been very good across sectors,” said an analyst from a leading domestic brokerage .
The JPA asset acquisition, analysts feel, will also have a significant impact on the overall profitability of companies in the cement sector.
Historical large-ticket mergers and acquisitions — Ambuja buying a stake in ACC in 1999, Grasim buying L&T’s cement business in 2004, and Holcim buying stakes in ACC and Ambuja in 2005 and 2006, the Deutche analysts said, have led to improvements in profitability and valuations in the sector.
CRH Plc, an Ireland-based diversified group, foresees a 20% rise in cement prices in India in the next 2-3 years if its bid for Jaiprakash Associates’ Gujarat business is anything to go by.
The company is reportedly looking to pick up a 51% stake in Jaypee’s Gujarat operations for an enterprise value of Rs 4,200 crore, or $160 per tonne.
“For this investment to generate a return on capital employed of 16%, we believe CRH is possibly pinning hopes on cement prices moving up by another 15-20%,” said Chockalingam Narayanan, Manish Saxena, and Abhishek Puri, analysts at Deutsche Bank - markets research in their recent report.
Also, the deal, if it goes through at the touted valuations, could lead to re-rating of a number of midcaps, the analysts, who also see prices moving up in the same band, said.
The Gujarat operation under consideration consists of a 3.6 million tonne clinker plant at Kutch with a 2.4 million tonne of cement grinding capacity, and a grinding plant in eastern Gujarat with capacity of 2.4 million tonne per annum, CRH had said in a note without sharing any financial details.
Analysts, while awaiting deal closure, said the price increase could be a short-term phenomenon and may be restricted to the Gujarat market as the plants are located there.
Rikesh Parikh, vice-president - markets strategy and equities, Motilal Oswal Securities, said the stake sale to CRH will not make much difference as JP Associates is likely to continue managing the facility and control the production. “There won’t be a meaningful impact on the overall cement prices as the plant is based in Gujarat,” he said.
Also, for companies to plan their next leg of capital expenditure, the cement prices need to rise another 15%.
“Our demand-supply model suggests that sector upturn could drive cement prices over next 12-24 months on logistical constraints,” the Deutsche analysts said.
Analysts said CRH is a very system-driven operator and its investment at such a premium is a clear indication of its commitment to the cement sector in the country.
“Their entry will make a significant impact on the overall Gujarat market where pricing has been under pressure owing to fragmented market with no capacity addition other than the JPA facility. The Gujarat market has been performing well since a little over two years now as demand has been very good across sectors,” said an analyst from a leading domestic brokerage .
The JPA asset acquisition, analysts feel, will also have a significant impact on the overall profitability of companies in the cement sector.
Historical large-ticket mergers and acquisitions — Ambuja buying a stake in ACC in 1999, Grasim buying L&T’s cement business in 2004, and Holcim buying stakes in ACC and Ambuja in 2005 and 2006, the Deutche analysts said, have led to improvements in profitability and valuations in the sector.
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