Ambuja Cements rating – Reduce: Deal is likely to boost growth plans

The adani group has entered into a definitive agreement to acquire Holcim’s share in ACEM-ACC. The divestment would trigger an open offer in both, ACEM and ACC, and the deal is likely to conclude in 6-9 months. The implied valuation is in line with historic mean on a trailing basis. We expect Adani to accelerate growth plans, invest in various cost saving projects and look to merge both entities in the long term. Adani is unlikely to give the incumbents any opportunity to take further market share from ACEM-ACC but we do not see any risk to market pricing discipline.

Adani Group wins the race to acquire Holcim’s stake in ACEM-ACC
Holcim has signed a binding agreement for the Adani Group to acquire its business in India, comprising its 63.11% stake in Ambuja Cement, which owns a 50.05% interest in ACC, as well as its 4.48% direct stake in ACC. The acquisition at Rs 385/share for ACEM and Rs 2,300/share for ACC is at 7-9% premium to current market price. The valuation implied stands at 12.5X/10X EV/Ebitda and $170/120/ton and is in line with ACEM/ACC’s past seven year average multiples on a trailing basis. The transaction would trigger open offer for 26% minority stake in both companies. The total deal size, assuming the same price for open offer, comes at $10.6 bn for Adani.

The proposed divestment is in line with Holcim’s business strategy to gradually pivot towards building a solutions business and away from traditional cement production. Holcim is aiming to expand Solutions & Products to 30% of Group net sales from 8%/15% in CY2020/21.

Holcim has valuable integrated assets and pan-India portfolio
In India, ACEM and ACC’s combined capacity could be 73 mtpa in CY2023, 12% of market capacity and a pan-India presence with integrated assets backed by limestone. The Ebitda/ton of ACC-ACEM is ~Rs 250-300/ton lower than UTCEM and the gap can be covered through (i) Rs 125-150/ton synergy benefit from eventual merger of ACC-ACEM, (ii) Rs 50-60/ton saving from royalty payment (1% of sales) to Holcim and (iii) investments in cost-saving projects like WHRS. In addition to the margin growth opportunity, Adani could reach 100 mtpa capacity through brownfield capacity at an attractive ~$80-90/ton.

Adani to be aggressive for growth but unlikely to break market discipline
In the last decade, Holcim India has lost capacity and volume market share, a leeway which is unlikely to continue with Adani. We expect Adani to capitalise on various low-cost brown-field expansion opportunities and move faster towards 100-mtpa capacity. Further, Adani could look more actively for further inorganic opportunities. However, given the high acquisition cost and likely leverage for the funding, we do not expect Adani to break the market discipline for quick market share gains.