What a Holcim exit would mean for ACC, Ambuja investors & cement sector

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NEW DELHI: When ACC announces its quarterly results on Tuesday, all eyes would be on what the management says on reports of Holcim exiting the cement maker and its twin Ambuja Cements, as part of a global strategy to focus on core markets.

While reports suggest JSW and Adani groups are in talks with Holcim regarding the same, analysts said the buyout would require investments in excess of $10 billion and chances of ‘aggressive’ buyers disturbing the sector appear low. That said, analysts see the possibility of a deep-pocketed investor entering the sector as a negative for UltraTech Cement and Shree Cement. They believe a potential Holcim exit should keep ACC and Ambuja Cements stock supported going ahead.

Holcim exiting India?
Kotak Institutional Equities finds merit in media reports. It said, “We will not be surprised as it appears that Holcim, under its CEO – Jan Jenisch, may gradually pivot towards building solutions business and away from traditional cement production.”

Holcim in 2021 announced ‘Strategy 2025’ where it articulated its target to expand Solutions & Products to 30 per cent of group net sales from 8 per cent in 2020 and 15 per cent in 2021. It is also aiming to grow aggregates and ready-mix business by 2025, but the cement division.

“Multiple bolt-on acquisitions in building solutions division and divestments of a cement business in Sri Lanka, Indonesia, Vietnam, Malaysia, Brazil and Russia, in the past few years, are in sync with the high-level strategy,” Kotak noted.

What’s on the block?
Motilal Oswal Securities noted that ACC has a grinding capacity of 31.4mtpa and plans to expand it to 39.9mtpa by 2024. About 42 per cent of ACC’s grinding capacities are in the North, followed by 28 per cent in the West, 26 per cent in the East and 5 per cent Central region. It recently announced capacity expansion plans in the East region.

Post-completion of the ongoing expansion, ACC will have 23-27 per cent grinding capacities in the East, South and Central regions whereas 15 per cent of its capacities will be in the North and 10 per cent of West regions, Motilal Oswal said.

What’s at stake?
An Ambuja-ACC buyout would project the buyer to the number position in the sector with a combined capacity of 67MTPA. At the prevailing market price, stake buy (including open offer) would imply a total cash outgo of $10 billion, which would boil down the number of interested buyers to a few, Jefferies said in a note.

Street chatter suggests that a buyout by an aggressive player could increase the competitive intensity, disturb the market dynamics and be negative for the overall space.

“We aren’t too convinced with this argument,” Jefferies said.

Who are the likely buyers?
Adani and JSW groups are reported to be interested buyers. As per reports, the stake purchase and the open offer that followed would require about $10.2 billion, open offer is pegged at $3.9 billion.

Adani group has been planning to enter the cement business and formed a separate subsidiary, Adani Cement Industries in June 2021.

“We believe that the company may plan to set up an integrated plant in Kutch, Gujarat and grinding units in Dahej, Gujarat and Raigad, Maharashtra. The group has also won limestone blocks in Andhra Pradesh, Rajasthan and Gujarat through a bidding process,” Motilal Oswal said.

In the case of JSW, JSW Cement has a grinding capacity of 15mtpa spread across South, East and West regions. About 59 per cent of this capacity is in the South followed by 26 per cent in the East and 15 per cent West regions.

JSW primarily depends on imported clinkers and at present, has a clinker capacity of 3.2mtpa only. Shiva Cement, a subsidiary of JSW Cement, is expanding its clinker cement capacities by 1.36mtpa/1mtpa, respectively.

In 2021, JSW Cement entered into the ready mix concrete business by setting up its first unit in Mumbai. It raised Rs 1500 crore from global PE investors in July 2021 for its next phase of growth plans.

What is in it for ACC, Ambuja & cement sector investors?
Jefferies noted that Lafarge India’s sale had led to a lot of churn at the top and mid-management level, which also led to slippage in the company’s strong and premium market positioning in the Eastern region then. In the case of ACC-Ambuja, it is possible that till the deal concludes (if at all), capex execution timelines or other efficiency projects could take a back seat, it said.

“Ambuja has sharply outperformed peers and the broader market in April, likely reflecting market anticipation for the M&A news. Ambuja is trading at $165 per tonne on a consolidated basis (FY23); on a standalone basis, Ambuja is trading at $200 and ACC at $125. In the near term, both these stocks may remain afloat on deal newsflows, driving outperformance versus other large-cap peers,” Jefferies said.

Ambuja’s recent sharp up-move tilts its preference towards ACC, it added.

JPMorgan said a potential Holcim exit should keep stock supported while the entry of a deep-pocketed new player would be negative for the industry.

Kotak said the deal valuation could factor in the capacity and margin expansion opportunity and be 15-20 per cent premium to current Ambuja Cements valuation or closer to UltraTech valuation.

A promoter stake sale in Ambuja would trigger an open offer in both ACC and Ambuja Cement. The potential deal size could be $10-12 billion, it said.

“We believe the incumbents are improbable candidates given UltraTech’s anti-trust issues and as Shree Cement prefers organic growth. Further, the deal size rules out the rest of the industry. In the last decade, Holcim India has lost market share, an unlikely leeway under a new promoter. We see an emerging overhang of market disruption and risk of de-rating on leaders – Ultra Tech and Shree Cement,” it said.



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