Shares of Ambuja Cements, part of the Adani Group, have surged over 3%, reaching a 52-week high. This spike follows the company’s announcement of acquiring Penna Cement Industries Ltd (PCIL) at an enterprise value of ₹10,422 crore. Let’s delve into why this acquisition is generating market excitement and why analysts have a positive outlook on Ambuja Cements’ future.
Major acquisition: Penna Cement industries
Deal overview
Ambuja Cements has acquired 100% of Penna Cement from the current promoters, Pratap Reddy and family. This purchase is entirely financed through Ambuja’s internal funds. Valued at ₹10,422 crore, the acquisition is a strategic move to bolster Ambuja’s presence, especially in South India.
Penna Cement’s contributions
Penna Cement boasts a total capacity of 14 million tonnes per annum (MTPA), with 10 MTPA already operational. The remaining 4 MTPA is under construction at Krishnapatnam (2 MTPA) and Jodhpur (2 MTPA), expected to be completed within 6 to 12 months. Additionally, the Jodhpur plant’s surplus clinker will support an extra 3 MTPA cement grinding capacity beyond the current 14 MTPA. This acquisition will elevate Ambuja Cements’ total capacity to 91 MTPA, significantly advancing their goal of 140 MTPA by FY28.
Market reaction: Stock price increase
Following the acquisition announcement, Ambuja Cements’ stock surged 3.86% to a new high of ₹690 per share on the BSE. The company’s shares have seen a consistent rally, gaining 13% in the past month and over 27% year-to-date.
Analyst insights: Why the optimism?
Emkay global financial services
Emkay Global Financial Services is optimistic about Ambuja Cements, maintaining a ‘Buy’ call with a target price of ₹700 per share. The acquisition of PCIL is viewed as value accretive, pegged at a favorable valuation of $89 per tonne, potentially decreasing to $79 per tonne with additional grinding capacity. The deal is expected to boost Ambuja’s market share by around 200 basis points pan-India and by 800 basis points in the South.
Antique stock broking
Antique Stock Broking also maintains a ‘Buy’ rating with a target price of ₹700, citing the implied valuation for 17 MTPA clinker-backed capacities at $85 per ton. The brokerage anticipates a 12% consolidated volume CAGR over FY24-26E, with an increase in EBITDA per tonne from ₹1,082 in FY24E to ₹1,304 by FY26E, driven by improved cost efficiencies.
Macquarie
Macquarie holds a neutral stance with a target price of ₹608 per share. They highlight Ambuja’s expanded footprint in South India, noting an improvement in capacity share from the current 4-5% to 10-11%. While the deal’s value per tonne is higher than organic expansion costs, it aligns with recent sector acquisitions. Macquarie emphasizes monitoring whether this acquisition helps Ambuja achieve its 140 MTPA target by FY28.
CLSA
CLSA is more conservative, maintaining a sell rating with a target price of ₹575. They calculate the deal’s valuation at $103 per tonne, compared to a replacement cost of $90-110 per tonne. CLSA notes that inorganic expansion, like this acquisition, has a lower adverse impact on the industry’s demand-supply chain.
Nuvama institutional equities
Nuvama Institutional Equities sees potential in the acquisition, noting that PCIL’s liquidity issues could turn around similarly to the Sanghi acquisition. They maintain a ‘Buy’ rating with a target price of ₹767 per share, highlighting the expected ramp-up in PCIL’s utilization rates and Ambuja’s healthy capex plans.
Strategic initiatives and growth plans
Ambuja Cements has reiterated its capacity target of 140 MTPA by FY28, with several strategic initiatives in place to achieve this goal. These include increasing the share of green power and alternative fuels and raw materials (AFR), long-term procurement strategies for critical raw materials, and optimizing logistics. The company’s focus on cost reduction through these initiatives is expected to yield positive outcomes, enhancing profitability and market competitiveness.
The bigger picture: Industry and market impact
Consolidation in the Cement industry
The consolidation trend in the cement industry is favorable for larger players like Ambuja Cements. As smaller players struggle, major firms with significant market share and resources can leverage economies of scale and improved operational efficiencies.
Market presence and expansion
Securing a foothold in the southern market aligns well with Ambuja’s growth ambitions. This acquisition not only boosts their capacity but also strengthens their market presence in a region that has significant growth potential. Analysts believe that Ambuja’s strategy of expanding through acquisitions will continue to be a key driver of growth.
Competitive landscape
The increasing market share of major players like Ambuja Cements is likely to further squeeze smaller competitors. This could lead to more mergers and acquisitions in the sector, as smaller companies may find it challenging to compete independently.
Conclusion: A promising future
The acquisition of Penna Cement by Ambuja Cements is seen as a significant and positive move by analysts and market watchers. The strategic fit, favorable valuation, and the potential for market share growth make this deal a cornerstone in Ambuja’s expansion plans. With robust growth targets and strategic initiatives in place, Ambuja Cements is well-positioned to strengthen its leadership in the Indian cement industry.
For investors, the bullish sentiment from several brokerages and the stock’s impressive rally indicate confidence in Ambuja’s growth trajectory. However, it’s essential to consider varying analyst perspectives and keep an eye on the company’s execution of its expansion and cost optimization strategies.
