The cement sector is once again in the limelight, but this time it is not for the issues of cost inflationary pressures. Sector investors may need to prepare for the announcement of a historic deal. Media reports said Switzerland-based construction materials conglomerate Holderind Investments Ltd (Holcim) is looking to exit India and seek stake sale in Ambuja Cements Ltd.
holsim Ambuja holds 63.19% stake and ACC Ltd holds 4.48% stake. It is to be noted that Ambuja also holds a 50.05% stake in ACC. Obviously, if such a deal happens, then it will not affect these stocks but other companies as well.
Analysts say the change in ownership could be a re-rating event for ACC and Ambuja. Investors would believe that these two companies are losing market share due to a lack of capacity. This comes at a time when their close rivals UltraTech Cement Ltd and Shree Cement Ltd were aggressively expanding their footprint across sectors.
According to Axis Securities Ltd., during the calendar year 2011-2016, Holcim lost 460 basis points (bps) market share due to weak capacity growth. One basis point is 0.01%. During this period, Shree Cement and UltraTech added 220 bps and 630 bps volume shares respectively, said the Axis report.
Perhaps, a flurry of this potential deal has got investors excited. Analysts at Jefferies India said Ambuja’s stock has outperformed ACC, UltraTech and the broader market so far in April, reflecting the market’s anticipation for merger and acquisition news. The Jefferies report said, “In the short term, while both of these stock deals may remain on newsflows, outperforming other large-cap peers, Ambuja’s recent sharp move tilts our preference toward ACC. “
But a big positive could come in the form of an improvement in the ability to push prices up in the near future. Analysts at HDFC Securities Ltd say that the delay in the sell-off due to its mega-deal size, regulatory approvals etc. could potentially focus ACC and Ambuja’s planned expansion. “This will be good news for the industry as the slow pace of capacity addition will ease the demand-supply imbalance, thereby supporting the pricing power of the industry,” the domestic brokerage house said in an April 18 report.
That said, since the loss of market share is a troubling one for ACC and Ambuja’s shareholders, expect the new buyer to go full force to fix it. Analysts at Kotak Institutional said, “Over the last decade, Holcim India has lost market share and an impossible discount under a new promoter. We see the risk of market disruption and de-rating on the leaders – UltraTech Cement and Shree Cement Ltd,” Equities said in a report on April 18. According to media reports, Holcim is in early talks with Adani and JSW Group for this deal.
Meanwhile, Holcim’s exit from its India cement business should be seen in the backdrop of its strategy to reduce its carbon footprint by 2025. The company aims to grow its cement business from around 35% of revenue in calendar year 2025 to down from 55% in 2021. Indonesia, Malaysia, Singapore and Brazil are among the regions where Holcim has already sold its stake in the cement business.