UltraTech Cement Ltd.

: Shareholders’ Dilemma About

Inorganic Growth

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Author: Rajni Kant Rajhans

Pub. Date: 2022
Product: Sage Business Cases
DOI: https://doi.org/10.4135/9781529796728
Keywords: shareholders, dilemma, plants, planting, India, economies of scale, government, debt, liability,
annual reports
Disciplines: Business & Management, Finance, Corporate Finance
Access Date: November 1, 2023
Publishing Company: SAGE Publications: SAGE Business Cases Originals
City: London
Online ISBN: 9781529796728

© 2022 SAGE Publications: SAGE Business Cases Originals All Rights Reserved.
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© Rajni Kant Rajhans 2022

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Abstract

The case discusses the dilemma faced by long-term equity investors regarding the business prospects
of UltraTech Cement Limited, the largest cement producing company in India, in the aftermath of the
acquisition of a financially stressed cement producer operating at lower production capacity. UltraTech
management believed that the acquisition would achieve economies of scale and lower lead time to
markets. Equity investors, on the one hand, were happy that the new, expanded UltraTech became the
fourth largest cement producer globally (excluding Chinese cement producers). But on the other hand,
the investors were worried about the likelihood of success of UltraTech in the wake of the acquisition.
Students will be asked to evaluate the decision of the management to acquire financially troubled and
operationally inefficient plants in an effort to achieve faster growth for UltraTech.

Case

Learning Outcomes

Learning outcomes of this case are to:

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• describe various methods of achieving business growth;

• discuss SWOT dimensions and implement the model for UltraTech;
• analyze the pros and cons of organic and inorganic growth; and
• justify the selection of an appropriate growth strategy under given conditions.

Introduction

On July 1, 2017, Mirling Quoton, an investment advisor, had advised his clients to invest in shares of Ultra-
Tech Cement Limited (henceforth UltraTech), the largest cement producing company in India. Mirling usually
advised only those investors who had a long investment horizon and who believed in the fundamentals of the
company he was recommending. The advice was posted online by Mirling after the announcement by Ultra-
Tech that it was acquiring cement plants owned by JP Associates. Mirling was optimistic about the potential
synergies between UltraTech and this acquisition. However, clients of Mirling were skeptical that this acquisi-
tion would be successful, as the acquired plants were operating at significantly lower than maximum capacity
and, as the acquisition was a completely leveraged buy-out, it was expected to create fixed obligations for
UltraTech, which in turn may potentially reduce earnings per share.

Cement Industry in India

In 2017, India was the second largest cement producer in the world—trailing only China—and contributed
almost 6.7% to worldwide cement production. The cement production in India had grown at a compound an-
nual growth rate (CAGR) of 3.95% between FY12 and FY17, whereas the Indian consumption growth was at
4.66% (on CAGR) during the same period. The production capacity utilization of Indian cement factories was
about 75% in the year FY17 with a production capacity of 375 million tons (MT) and actual production of 280
MT.

The cement industry in India was dominated by private producers (almost 98% of total capacity is with private
companies). The leading cement producing companies in India are provided in Table 1. The largest 20 com-
panies produce almost 70% of the total annual production. Furthermore, most of the plants are concentrated
in Andhra Pradesh, Rajasthan, and Tamil Nadu (southern and western parts of India).

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Table 1. Top 10 Cement Producing Companies in India in 2017

Cement companies Production capacity (MTPA)

UltraTech 93

Shree Cement 34.7

ACC 33.4

Ambuja 29.65

Dalmia Cement 25

JK Lakshmi Cement 17.5

Ramco 16.45

Birla Corp 15.5

Prism Cement 11

Orient Cement 8

MTPA: million tons per annum

Source: ACC (2017); Ambuja Cement (2017); Birla Corporation (2017); Dalmia Cement (2017); JK Lakshmi
Cement Ltd; Orient Cement (2017); Prism Cement (2017); Shree Cement (2017); The Ramco Cements Lim-
ited (2017); UltraTech Cement (2017b)

The small per capita consumption of cement (200 kg) in India relative to the global average of 350 kg signified
the huge growth potential for the cement industry in India. The cement demand in India is projected to reach

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550 MT by 2025. The major contributors to this growth in demand are various infrastructure projects under-
taken by the Indian government such as the Bharatmala Project, Housing For All by 2022, and Smart City
Projects (see Appendix for details of these projects).

As the chief drivers of the projected increase in per capita cement production and use are government pro-
jects, there is high risk involved in these projects. A change in government may be accompanied by a change
in priorities, which might reduce the possibility of successful completion of these projects. There are other
factors as well that might impact the construction industry in India in general and the cement industry in par-
ticular, such as an increase in the debt level of the Indian government and the possibility of an interest rate
increase (which can lead to an increase in borrowing costs for both government and private players).

The construction industry in India was facing issues related to developers’ high level of debt and non-repay-
ment of loans, which was leading to increasing amounts of non-performing assets. An increase in crude oil
prices might also increase the input cost for cement producing companies, which could in turn lead to an es-
calation in the budgeted costs of these proposed projects.

Real estate development, which had been a major consumer of cement in India, was undergoing a slowdown
after the 2007–2008 global financial crisis. Until 2016, real estate development consumed around 67% of the
Indian cement production of India. However, policy measures by the government to demonetize high-value
currency notes (demonetization) in order to crack down on black money, terror funding, and other illegal ac-
tivities, had a deleterious effect on the real estate sector. An increase in housing prices also contributed to
the slowdown in the real estate sector. The government took steps to encourage growth in this industry by
offering several incentives to industries involved in real estate development, such as faster clearances of con-
struction permission. The Indian government plan, Pradhan Mantri (Prime Minister) Awas Yojana (PMAY), a
scheme to provide housing for all Indian citizens by 2022, was in part enacted to bolster the slowing demand
for housing.

UltraTech Cement: History

UltraTech Cement was established in the mid-1980s. The company grew slowly for the first two decades,
reaching in 2003 the total production capacity of only 14.2 MT. In 2004, UltraTech acquired a majority stake

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in L&T Cement Limited, which almost doubled its total capacity to 30 MT. UltraTech continued to increase
production capacity, both organically and inorganically. In 2010, it made a global foray by acquiring ETA Star
Cement Company. The acquired company had operations in UAE, Bahrain, and Bangladesh. In 2017, UltraT-
ech had a capacity of approximately 93 MTPA (million tons per annum) with 18 integrated plants, 25 grinding
units, one clinkerization plant, and seven bulk terminals. (Clinkerization is a process that involves heating the
mined limestone raw material in the presence of aluminum silicates minerals, which transforms the mixture
into cement.) UltraTech was the largest manufacturer and exporter of concrete in India in the year 2017.

Growth Path of the Company

UltraTech Cement adopted a mixed strategy for growth. The capacity expansion was achieved through var-
ious business re-structuring, expansion, modernization, and acquisition routes. UltraTech management kept
maximization of shareholder investments at the core of the business decisions. With that focus, the compa-
ny followed a cautiously aggressive approach to become a market leader and had almost tripled its capacity
from 30 MT in 2004 to 93 MT in 2017 (see Figure 1).

Figure 1. Growth of UltraTech: Organically and Inorganically

Source: Compiled by the author from UltraTech Cement Annual Reports (2016, 2017a)

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Presence of the Company Before Acquisition of JP Cement

In 2015, UltraTech had plants in 13 Indian states, with the plants distributed throughout the country (see Fig-
ure 2). Also in 2015, the company had maximum production in Gujarat (11.65 MTPA), followed by Maharash-
tra (10.56 MTPA), Rajasthan (8.5 MTPA), Karnataka (7.4 MTPA), Andhra Pradesh (6.5 MTPA), and others
(see Table 2).

Figure 2. Geographical Distribution of UltraTech Cement Facilities After the Acquisition of

JP Cement

Source: UltraTech’s Investors Call Presentation (UltraTech Cement, 2017c, 2018)

Table 2. Regional Production Capacity of UltraTech Cement in 2015

Region Capacity (MTPA) % mix

North 19 28.7

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East 11.4 17.2

South 20.4 30.8

West 15.5 23.4

Source: Compiled by the author from various reports published by the company (UltraTech Cement, 2016)

The Deal: Acquisition of JP Associates Cement

JP Associates, the parent company of JP Associates Cement, was carrying a very large amount of USD 8.47
billion debt on its books, including a debt of around USD 354 million attributable to its cement business. The
group of lenders forced the company to lower its debt level by selling assets. Hence, the company decided
to sell its plants located in Himachal Pradesh, Uttar Pradesh, Madhya Pradesh, and Andhra Pradesh, which
collectively had a total cement production capacity of 21.2 MTPA (see Table 3 for the financial summary of JP
Associates’ cement segment). Prior to their purchase by UltraTech, these plants were running at a production
capacity of only around 15%.

Table 3. Financial Summary of JP Associates’ Cement Segment (USD million)

FY13 FY14 FY15

Revenue 1,410.794 1,377.53 1,206.59

PBDIT 102.718 27.874 30.954

Capital employed 3,191.65 3,284.666 2,796.64

PBDIT: Profit before depreciation, interest, and taxes

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Source: Compiled by the author from annual reports of JP Associates (Jaiprakash Associates Ltd, 2014,
2015, 2016). Values converted from INR to USD

The purchase of JP Associates Cement involved the transfer of debt from JP Associates’ book to that of Ul-
traTech. The amount of this transfer was approximately USD 1,771 million. This loan was to be refinanced at
a lower rate because the credit rating of UltraTech had a much better credit rating than JP Cement. The credit
rating of UltraTech was AAA for long-term loans and A1+ for short-term loans at the time of the acquisition by
UltraTech. Furthermore, the balance of the money (i.e., gap funding) was borrowed on its own (UltraTech’s)
book, thus making it a case of a leveraged buy-out. The share prices of both companies increased on the day
of the announcement; UltraTech was up by 1% and JP Associates was up by 4%. The deal was announced at
a valuation of USD 2,493 million in February 2016. This deal was the largest to date in the cement industry in
India and placed UltraTech as the fourth largest player (installed capacity) in the global cement industry, one
notch lower from the third placeholder (see Figure 3). Chinese companies are not considered in this ranking.

Figure 3. Capacity of Global Players in MTPA

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Source: Compiled by author from UltraTech Annual Reports (UltraTech, 2016, 2017a)

The inorganic path followed by the company for its cautious aggressive growth has been observed and sup-
ported from various dimensions, as is the case for the higher gestation period associated with greenfield pro-
jects, delay in land acquisitions, and challenges in acquiring the rights of limestone (a major ingredient of
cement) mines (which are offered only through auction).

UltraTech Management’s Perspective

The UltraTech management had pursued this acquisition primarily as a means of geographic market expan-
sion. Table 4 provides details of production and geographic distribution for UltraTech before and after the ac-
quisition of JP Cement. The other benefits cited by UltraTech management were synergies in manufacturing,
distribution, and logistics. The Chairman of UltraTech Cement, Kumar Mangalam Birla, said, “The acquisition
will offer economies of scale and lower lead time to markets.” Most of the acquired assets were ready-to-use
and hence might help in faster value creation for shareholders.

Table 4. Production Capacity and Mix of UltraTech Cement Before and Just After Acquisition

Capacity (MTPA)

Region % mix

Pre JP Cement Post

North 19 16.2 35.2 40.23%

East 11.4 0.00 11.40 13.03%

South 20.4 0.00 20.40 23.31%

West 15.5 5.00 20.50 23.43%

Source: Compiled by the author from data available at UltraTech’s Investors Call Presentation (UltraTech,
2017c, 2018)

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Other Facts

UltraTech reported logistic cost reductions from USD 16.9 per ton in 2015–2016 to USD 16.54 per ton in
2016–2017, even with the price of diesel fuel increasing by 13% during the same period. The reason cited in
the annual report of the company was a reduction in average lead distance. However, UltraTech had a poor
record in energy management. Cement plants are energy-intensive production units and the energy used by
these plants accounted for almost 30% of total manufacturing cost. For UltraTech, the cost of energy was al-
most 40% in 2016 and 2017. To overcome this high energy cost, UltraTech adopted a higher mix of pet coke
(petroleum coke is a low-cost fuel) in 2017 (74% of fuel), compared to 2016 (70%). This helped UltraTech
reduce the energy cost from USD 12.69 per ton in 2016 to USD 11.75 per ton in 2017. However, pet coke
dependency was not sustainable as its price was volatile and high-quality pet coke was only available via
import. Moreover, its carbon emission is higher than coal and hence the government regulates the import of
pet coke in India. UltraTech had high operational efficiency with plants running at around 78% of the installed
capacity. Table 5 and Table 6 contain financial information for UltraTech.

Table 5. Balance Sheet of UltraTech as of March 31, 2016 (INR milliona)

Equity and liabilities Assets

Shareholders’ fund Non-current assets 286,610.8

Equity 2,744.3 Current assets

Reserves & surplus 204,616.6 Cash & bank balances 23,352

Total shareholders’ fund 207,360.9 Other current assets 68,558

Non-current liabilities Total current assets 91,910

Long-term borrowings 24,908.4 Total assets 378,520.8

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Other liabilities 34,160

Total non-current liabilities 59,068.4

Current liabilities

Short-term borrowings 23,390.7

Other liabilities 88,700.8

Total current liabilities 112,091.5

Total liabilities 378,520.8

a To convert INR to USD use 0.0154 as the conversion factor

Source: UltraTech Cement (2016)

Table 6. Trend of Important Financial Ratios for UltraTech

Ratio 2012–2013 2013–2014 2014–2015 2015–2016

EBITDA margin (%) 25 21 20 20

Interest coverage ratio (times) 15.09 10.46 7.76 9.31

ROCE (%) 20 13 12 12

Debt–equity ratio 0.29 0.28 0.35 0.23

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EPS (INRa) 96.87 78.21 73.44 79.25

Average market capitalization of UltraTech in February 2016 (INR) 763,034.1 million

a To convert INR to USD use 0.0154 as the conversion factor

EBITDA: earnings before interest, taxes, depreciation, and amortization; ROCE: return on capital employed;
EPS: earnings per share

Source: UltraTech Cement (2016); Average market capitalization was calculated from the share trading price
data collected from National Stock Exchange (NSE).

The Dilemma

The acquisition by UltraTech of the cement manufacturing plants previously owned by JP Associates provided
a wider geographical reach for UltraTech. However, inefficient operations of these acquired plants was an
important issue. Converting these underperforming plants to efficient plants was a major challenge for Ultra-
Tech. As a result, the clients of Mirling were very skeptical about the outcomes of this acquisition. They were
concerned about the potential decline in earnings per share and the overall operational and financial efficien-
cy of UltraTech as a consequence of this acquisition.

Discussion Questions

1. Describe the purchase of the cement plants of JP Associates by UltraTech from the perspective of
market reach.
2. List the probable benefits UltraTech will realize from the acquisition of JP Cement. Do you agree with
the kind of synergies management has highlighted?
3. Perform a SWOT analysis of UltraTech Cement.
4. Comment on the inorganic growth path followed by UltraTech Cement, as described in this case.

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What are your thoughts on the concerns expressed by Mirling’s clients?

Further Reading

Closure of UltraTech-JP deal marks biggest resolution of stressed assets . (2017, June 29). Business
Line. https://www.thehindubusinessline.com/companies/closure-of-ultratechjp-deal-marks-biggest-resolution-
of-stressed-assets/article9741544.ece

IBEF. (2018). Cement industry in India. https://www.ibef.org/industry/cement-india.aspx

Nandamuri, P. P. , & Mishra, M. K. (2017). Cement industry (B): Demand-supply dynamics. Journal of Case
Research, III(2), 1–20.

UltraTech completes acquisition of Jaiprakash group cement business. (2017, June 29). Economic Times.
https://economictimes.indiatimes.com/industry/indl-goods/svs/cement/ultratech-completes-acquisition-of-
jaiprakash-group-cement-business/articleshow/59372842.cms

UltraTech buys Jaypee cement units for Rs. 15,900 cr. (2016, April 1). Business Standard. http://www.busi-
ness-standard.com/article/companies/ultratech-buys-jaypee-cement-units-for-
rs-15-900-cr-116040100070_1.html

UltraTech completes acquisition of cement plants of Jaiprakash Associates Limited . (2017, June 30). Aditya
Birla Group. http://www.adityabirla.com/media/press-releases/ultratech-cement-completes-acquisition-of-ce-
ment-plants-of-jaiprakash-associates-limited

References

ACC. (2017). ACC at a glance. https://www.acclimited.com/about/acc-at-a-glance

Ambuja Cement. (2017). Ambuja cement at a glance. https://www.ambujacement.com/about-ambuja/ambuja-

at-a-glance

Birla Corporation. (2017). Overview: Cement. https://www.birlacorporation.com/cement.html

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Dalmia Cement. (2017). About us. https://www.dalmiacement.com/about-us/

Jaiprakash Associates Ltd. (2014). Annual report 2013–14. http://www.jalindia.com/annualreports/Annu-

al%20Report%20for%20the%20year%202013-14.pdf

Jaiprakash Associates Ltd. (2015). Annual report 2014–15. http://www.jalindia.com/annualreports/Annu-

al_Report_for_the_Year_2014-15.pdf

Jaiprakash Associates Ltd. (2016). Annual report 2015–16. http://www.jalindia.com/annualreports/Annu-

al_Report_for_the_Year_2015-16.pdf

JK Lakshmi Cement Ltd. (2017). Company overview. https://www.jklakshmicement.com/company-overview/

Orient Cement. (2017). About. https://orientcement.com/orient-cement/

Prism Cement. (2017). About us. https://www.prismcement.com/about-us.php

Shree Cement. (2017). Our business. https://www-shreecement-com.translate.goog/our-busi-

ness?_x_tr_sl=ja&_x_tr_tl=en&_x_tr_hl=en-GB&_x_tr_pto=nui,se,op,elem,sc#breadcum

The Ramco Cements Limited. (2017). About us. http://www.ramcocements.in/about-us.aspx

UltraTech Cement. (2016). Annual report. https://www.ultratechcement.com/common/images/downloads/An-

nual%20Report%20-%202016.pdf

UltraTech Cement. (2017a). Annual report. https://www.ultratechcement.com/content/dam/ultratechcemen-

twebsite/pdf/financials/annual-reports/06222018181635_UltraT-
ech%20AR%20-%202016-17%20-%20Web.pdf

UltraTech Cement. (2017b, May). Corporate dossier. https://www.ultratechcement.com/content/dam/ultrate-

chcementwebsite/pdf/financials/investor-update/UltraTech%20Corporate%20Dossier%20May%2017.pdf

UltraTech Cement. (2017c). Investor presentation. https://www.ultratechcement.com/content/dam/ultrate-

chcementwebsite/pdf/financials/investor-update/UltraTech%20Results%20Q4FY17.zip

UltraTech Cement. (2018). Investor presentation. https://www.ultratechcement.com/content/dam/ultratechce-

mentwebsite/pdf/financials/investor-update/UltraTech%20Q3-FY18%20Investor%20Presentation.pdf

https://doi.org/10.4135/9781529796728

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