Ambuja Cements Ltd - Stock Valuation and Financial Performance

Good results on back of improvement in EBITDA/ton realization.

Ambuja Cements' recent acquisition of a 56.74% stake in Sanghi Industries at Enterprise Value of Rs. 5000 Cr has drawn attention as a positive move for both companies and the cement industry as a whole. The acquisition is fully funded through internal accruals.The deal offers several strategic advantages for Ambuja Cements. 

The impacts of this acquisition are-

1. Advantages to Ambuja Cements :

The acquisition of Sanghi Industries is a good deal for Ambuja Cements for several reasons. First, it allows Ambuja to significantly expand its production capacity to 73.6 million metric tonnes per annum (mtpa). Furthermore, Ambuja's ambitious goal of reaching 140 mtpa capacity by 2028 will now be achieved ahead of schedule, thanks to the enhanced production capacity from the deal.

With Sanghi Industries boasting abundant limestone reserves, Ambuja Cements can ramp up its production capacity further. The plan to increase the cement capacity at Sanghipuram to 15 mtpa over the next two years indicates a strong commitment to growth and market domination.

The deal was struck at a favorable price of $100 per tonne for a 6.1 mtpa capacity, proving to be attractive for Ambuja Cements. Additionally, the ability to add grinding capacity with minimal capital expenditure will further bolster their cost-effectiveness. Notably, the available clinker of 6.6 mtpa can cater to nearly 10 mtpa of cement production, promising efficiency gains.

2. Benefits for Sanghi Industries:

For Sanghi Industries, this acquisition is equally promising. The promoters' decision to sell a majority stake signifies their inability to scale up sales volumes effectively. With Ambuja Cements taking over, Sanghi Industries will benefit from a stronger and more resourceful promoter, which will likely bolster shareholder confidence and contribute to the company's growth prospects.

3. Positive Impact on the Industry:

This consolidation in the cement industry is viewed as a positive development overall. Such moves tend to enhance operational efficiency, foster innovation, and drive economies of scale. However, there are potential challenges that need to be addressed.

The increased supply in the Gujarat market due to the deal, warrants careful observation of pricing trends. As the market becomes more competitive with additional supply, monitoring how pricing dynamics evolve will be crucial for industry players.

Furthermore, the aggressive capacity expansion plans by Adani Cement, which aims to achieve 101 mtpa capacity by 2025, may influence the demand-supply balance. It remains essential to closely monitor the industry's demand trajectory to ensure a stable market environment.

In conclusion, the Ambuja-Sanghi deal marks a positive step for both companies and the cement industry, driven by the potential for increased production capacity, strategic synergies, and positive market consolidation. However, stakeholders should remain vigilant and adapt to changing market dynamics to fully capitalize on the opportunities this acquisition presents.

ACL reported volume/Revenue growth of 8%/8% YoY. The quarter’s volume stood at 8.1 Mn tonnes per annum (Mntpa), up 8% YoY and 5% QoQ.The company recorded an EBITDA margin of 18.5% (expectation of 19.4%) against 20.1% YoY. ACL’s EBITDA/tonne stood at Rs 973, down 8% YoY but higher by 20% QoQ.

Results on good, driven by cost synergies and improvement in EBITDA per tonne.

Results: Ambuja Cement reported 3% decline in sales due to volume decline of 10% partially offset by price hikes taken in Jan-Feb’20. Operating profit came in higher by 30% over previous year and 10% over previous quarter due to lower power & fuel costs. 

Key highlights:

• EBITDA/ton, a popular measure in cement companies, was at Rs 1047 in this quarter versus Rs 782 and Rs 987 in CY18 and CY19 respectively. This was primarily from price hikes and favorable fuel costs.
• Volume declined by 10% due to unavailability of labour across the channel during last 15 days of the quarter.
• Focus on premium products continues and it also added to profitability.
• Ambuja owns 54% stake in ACC, ACC reported 12% decline in volume and profitability of Rs 893/ton. ACC stake contributes Rs. 50/share in Ambuja’s valuation.

Outlook: Unfortunately the volume decline could be sharper for Cement companies as the construction work will get delayed from extended lockdown, immediately followed by monsoon when construction activities are slow. Thanks to its cash holding in excess of Rs 3,000 Cr, Ambuja can weather the storm from drop in volumes. 

Ambuja Cements is a conservative cement company as it preserved cash from lower capex versus peers in recent years due to oversupply in some regions. Cash on books gives it more cushion to handle the situation in this calendar year. After considering capacity addition, the company today trades at $75/ton CY22 versus Ultratech > $150/ton and Shree Cement > $250/ton. However, Ambuja has traded at low valuation for long due to i) slower growth ii) low ROCE from lower capacity utilization. Other Cement players also didn’t earn high ROCE but growth in capacity helped them enjoy better valuation.  

Swiss based cement giant Holcim has announced restructuring of its Indian operations. Ambuja cements will acquire 24% stake in Holcim India for Rs. 3,500 Crores in a full cash acquisition followed by a stock merger between the two.Post reshuffling, Holcim India’s 9.7% stake in Ambuja will stand cancelled and Ambuja will hold 50% stake in ACC. Ambuja will issue 58.4 Crores fresh equity shares for Holcim international, whose share in Ambuja will effectively increase.

We feel that, this restructuring strategy of Holcim is inherently negative as it will just weaken the balance sheet of Ambuja Cements. Holcim is essentially taking out the surplus cash from Ambuja Cements to strengthen its own balance sheet. We feel that this move is mainly to deleverage its balance sheet which has witnessed an increase in Debt to EBITDA ratio in the last 5 years. This deal, thus, works out to be extremely negative for Ambuja’s minority shareholders.

At present, the deal has no impact on ACC, financially. However, ACC too has excess cash present on its balance sheet. The poor corporate governance practice leads to fears on the future negative impact on ACC’s strong balance sheet.

In the past, independent directors of ACC and Ambuja cements had stood their ground against bad corporate governance practices initiated by Holcim and forced it to withdraw such measures. However unfortunately, this time it did not happen.

As for ACC, post this, we do not see any major changes in its current valuation. However, for Ambuja Cements there will be a negative impact on the MRP. We are studying the deal in detail and will get back soon with a detailed note and revisions in MRP and DP for both the companies.