Shares of Ambuja Cements Ltd and ACC Ltd rose 2.5% and 4% respectively on Monday after Adani Group announced acquisition of Holcim Ltd’s stake in Ambuja and ACC through an offshore special purpose vehicle. The deal triggers an open offering, with the total value of the transaction being $10.5 billion. Even after considering Monday’s share price gains, the offer prices are at a nearly 5% premium.
Analysts at Jefferies India believe that the deal value means an enterprise value per tonne of $164 and $152 for CY22 and CY23 estimates, respectively. “Given that the Adani Group is paying for the acquisition, the EBITDA required per tonne to achieve double-digit return on equity is around Rs 2,000 (1:1 loan on equity, 7% interest rate and 80% capacity utilization). assuming) analysts at Jefferies said in a report on May 16. Ebitda is earnings before interest, taxes, depreciation and amortization.
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Investors will now have to see how competitive intensity shapes up and the impact it will have on pricing. Over the past decade, both Ambuja and ACC have lagged behind their competitors in terms of capacity addition, thus losing market share in volumes. According to Kotak Institutional Equities, the 10-year volume compound annual growth rates for Ambuja and ACC are 3% and 2%, respectively, compared to UltraTech Cement’s 9%. Ambuja and ACC had a combined capacity of about 67.5 million tonnes at the end of March.
In such a situation, this deal can bring turnaround. “While Adani is unlikely to offer any further market share from Ambuja-ACC, we do not see any risk to market pricing discipline,” Kotak analysts said in a report on May 16.
Moreover, both the companies will benefit from synergy due to presence of Adani companies in all sectors, which will help in margin expansion. Further, “Ebitda margin per tonne for both the companies could increase by 5-7% if Adani discontinues the technical know-how fees that Ambuja and ACC Holcim used to pay (at 1% of sales), ” Told. A report from Nomura on May 16.
Announcements on development plans, funding, and a possible merger of Ambuja and ACC will be important factors that should be addressed. The transaction is expected to close in the second half of CY22, making Adani the second largest cement producer in India in terms of capacity.