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Sensex Opens Flat; Ultratech Cement Gains 3.6%
Mon, 21 May 09:30 am

Asian shares are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.5% while the Hang Seng is up 1.2%. The Shanghai Composite is trading up by 0.7%. Meanwhile, the S&P 500 and Nasdaq composite closed lower on Friday as tensions between the US and China weighed on investor sentiment while both countries continued negotiations on trade.

Back home, India share markets opened the day on a flattish note. The BSE Sensex is trading up by 16 points while the NSE Nifty is trading down by 3 points. The BSE Mid Cap index opened down by 0.6% while BSE Small Cap index opened down by 0.3%.

Sectoral indices have opened the day on a mixed note with PSU stocks and bank stocks witnessing maximum buying interest. While, healthcare stocks and automobile stocks opened the day in red. The rupee is trading at 67.96 to the US$.

Cement stocks opened the day on a mixed note with Birla Corp & India Cements leading the gainers. As per an article in a leading financial daily, UltraTech Cement Ltd, part of the Aditya Birla group, will acquire the cement business of BK Birla group's Century Textiles and Industries Ltd in an all-stock transaction.

Reportedly, shareholders of Century Textiles will receive one share of UltraTech for every eight shares held.

The enterprise value of Century's cement business is pegged at Rs 85.6 billion and UltraTech will absorb debt of Rs 30 billion.

The announcement is the culmination of a plan that was eight years in the making and involved consolidating the cement businesses of the two groups into one firm and the BK Birla group exiting non-core businesses to focus on real estate.

Century Textiles' cement assets comprise three integrated units in Madhya Pradesh, Chhattisgarh and Maharashtra with a total capacity of 11.4 million tonnes per annum (mtpa) and a 2 mtpa grinding unit in West Bengal.

The transaction will provide UltraTech the opportunity for further strengthening its presence in the highly fragmented, competitive and fast-growing east and central markets and extending its footprint in the western and southern markets in the country.

On completion of the transaction, UltraTech's capacity will rise to 109.9 mtpa, including its overseas operations. This will make UltraTech the world's third-largest cement maker outside China.

Meanwhile, UltraTech is also in the race to buy the cement assets of its insolvent competitor Binani Industries. It has bid Rs 79.9 billion for Binani's cement plants and is fighting off a challenge for the same from the Dalmia Bharat group.

Speaking of the cement industry, the sector was always in a need of revival considering its importance role in India's growth story. The logical route seemed to be consolidation.

India, with 550 companies, is the second-largest producer of cement in the world. However, 70% of the cement is produced by the top twenty companies. The other companies used to dump cement at low prices creating havoc in the market. Consolidation is expected to increase the pricing power of the top producers and lead to better margins.

There's been one downside though. All this consolidation has weakened the balance sheet of these top cement companies.

The net debt-to-equity ratio of the 26 companies rated by Crisil is likely to increase to 2.9 times in 2018 as compared to 1.5 in 2017. Debt funded 78% of the acquisition cost in FY17.

However, once the synergy benefits kick in, debt levels are expected to reduce from FY19. This will provide respite to cement producers who have been engaged in price wars with small players for a long time.

Cement Companies Increasing Leverage

Ultratech Cement share price opened the day up by 3.6%.

Moving on to the news from the economy. Petrol price has hit a record high of Rs 76.24 per litre in Delhi, beating the previous all-time high of Rs 76.06 of September 2013 after oil marketing companies raised prices by 33 paise on Sunday.

Diesel prices were also raised by 26 paise on Sunday at Rs 67.57 per litre in Delhi as per daily price revision method introduced last year in June.

Sunday's high follows seven consecutive days of price increases after a 19 day freeze on oil prices between April 24 and May 13 in the run-up to the assembly elections in Karnataka.

Domestic prices of petrol and diesel have gone up as high crude oil prices in the international markets, benchmark crude oil price for the Indian basket hit US$76.43 per barrel last week the highest since 2014, and a weak rupee against dollar, which makes imports expensive, have forced the hands of the three state oil marketing companies.

The Indian currency at Rs 67.53 per dollar has fallen by 6% against the greenback in 2018 so far. It is one of the worst performing currencies this year across the world. India imports nearly 80% of its crude oil requirement every year.

Notably, prices of petrol and diesel in India have witnessed a steady increase in the past four years as the government has hiked excise duties on fuels a dozen times in this period.

Already, India's oil import bill, which had come down between 2014 and 2017, may go up in the range of US$20-50 billion in FY19. Last fiscal the country spent US$88 billion on oil imports. At the start of this fiscal, the petroleum and natural gas ministry had estimated a 20% increase in the import bill to US$105 billion for fiscal 2019 assuming average crude oil price for the Indian basket at US$65 per barrel.

The higher import bill threatens India's current account deficit, a barometer to measure a country's imports and exports.

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