Shree Ce­ment

The Hitavada - - BUSINESS -

UAE ac­qui­si­tion: Sur­plus cash de­ploy­ment at good yield. steady 3Q earn­ings de­spite sand and cost chal­lenges Shree Ce­ment an­nounced the ac­qui­si­tion of a ma­jor­ity stake in Union Ce­ment Com­pany (UCC, listed in the UAE) at an en­ter­prise value (EV) of US$305MM (~Rs19.5B). The trans­ac­tion im­plies an EV/ton val­u­a­tion of ~US$75 – a sig­nif­i­cant dis­count to past M&A costs (US$125-160/ton) and the cost of green­field ex­pan­sion in the Mid­dle East. UCC has been de­liv­er­ing steady op­er­at­ing prof­its over the past four years de­spite mar­ket chal­lenges. The yield on trans­ac­tion in­vest­ment (as­sum­ing sta­ble profitabil­ity) works out to ~11%, bet­ter than the sub-7% trea­sury yield on liq­uid funds. While some in­vestors may not like an over­seas foray in a low-growth mar­ket, we think the deal is es­sen­tially de­ploy­ment of sur­plus cash at a bet­ter yield and does not al­ter the strong growth pro­file of Shree. Separately, Shree de­liv­ered a steady Dec-Q amidst sand and cost-side chal­lenges (EBITDA Rs5.7B, +16% Y/Y). Net net, we re­main pos­i­tive on Shree and ex­pect strong vol­ume/ EBITDA growth (14% /30% CAGR over FY18-21E) over the medium term sup­ported by size­able ca­pac­ity ex­pan­sion in the next 12 months.

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