UltraTech + Samruddhi Cement Merger – Swap Ratio – Analysis

UltraTech Cement and Samruddhi Cement, a wholly owned subsidiary of Grasim Industries, approved Samruddhi’s merger with UltraTech. Samruddhi shareholders will receive 4 shares of UltraTech at a face value of Rs 10 each for every 7 shares of face value Rs 5 each The deal will make UltraTech, the largest cement company in India and the 10th largest in the world.

Proposed merger earnings – The given share ratio is modestly earnings accretive for Ultratech. We do not see significant incremental synergies in the near term given that the cement businesses (Grasim and Ultratech) are already
operationally integrated, i.e. common branding (Brand Ultratech), and functionally

EBITDA for Ultratech will decline 13% y-o-y in FY11. HSBC’s valuation for Ultratech is based on a 2011 multiple of 6x (earlier 7x) on the consolidated cement business which is the lower end of its historical trading range of 6-8x. Our new target price of INR811.

While Analysts at Goldman Sachs take a contrarian view and argue that Holcim group (ACC/Ambuja) were the preferred companies by FIIs due to their pure play cement business. However, FIIs will now have a choice – Ultratech and hence valuations should narrow [Valuation of Ultratech should rise with a target price of Rs 894]

Kotak expects the combined entity to report an EPS of Rs 84 and Rs 96 for FY11 and FY12 respectively with a target price of Rs 925.

Morgan Analysts say the proposed swap ratio is EPS neutral for merged UTT in F11, on their estimate and broadly in line with current replacement cost for cement plant in India.

Religare shares the same opinion as Goldman Sachs – The stock is currently trading at a P/E of 9.4x and an EV/EBITDA of 5.9x on FY11E. The merger will narrow the valuation discount between UltraTech and other cement majors such as ACC and Ambuja Cement.