ACC-Ambuja merger to ease investor concerns

Valuation gap with peers should also narrow as merger will drive profitability and volumes

The decision of ACC and Ambuja Cements to explore a merger should be well received by investors. The merger of two LafargeHolcim group companies (Ambuja owns 50.05% in ACC) is likely to unlock gains across many fronts including geographical presence, operations, profitability, marketing, distribution, and raw material sourcing, among others, for the combined entity. The news came after market hours on Friday.

After the merger, the combined entity will have the largest cement-manufacturing capacity in India after UltraTech, allowing it to increase its geographical presence and market share. ACC is a pan-Indian player, while Ambuja is predominantly north-centric with some interests in West, East and Central India. Thus, while ACC strengthens its northern exposure, Ambuja will get access to new markets. G Chhokalingam, founder, Equinomics Research, says the companies would be able to drive volume growth.

Sub-par volume growth and market share trends for the two companies have been a major concern of the investors, looking at their slower capacity expansions. Analysts at Emkay Global had recently said that they expected the volume growth of Ambuja to remain below that of its peers in the absence of expansion. However, analysts believe that on completion of merger, capacity additions may gather pace. The combined entity will also have a stronger balance sheet and, thus, can explore an inorganic route as well.

Better volume growth should also address profitability concerns. ACC and Ambuja had posted Ebitda (earnings before interest, taxation, depreciation, and amortisation) per tonne of around Rs 400 and Rs 600, respectively during the March quarter; UltraTech’s was Rs 858 per tonne. The profit margin was weighed down by higher costs. Both companies had seen lead distance for sourcing of fly ash increase. Coal and petcoke prices are already on the rise.

The merger should help cut costs, especially logistics and raw material sourcing, which Binod Modi at Reliance Securities estimates at about Rs 600 crore a year for the two companies. Jaspreet Singh Arora, head of research at Sytematix Shares, says that the combined entity can see close to Rs 900 crore synergy benefits, as indicated by the management earlier at the time of amalgamation of ACC and Ambuja. 

Analysts say how the two brands are managed and the pace of integration are key monitorables. Arora says he will be watching employee count management as merger-related issues can delay integration. The market will also be looking forward to the merger valuation and share-swap ratios.

Also, Competition Commission approval will be crucial. Teena Virmani at Kotak Securities points out that it may be difficult because the market share of the combined entity may breach limits in certain regions. But Virmani sees multiple benefits from the merger in terms of cost savings on marketing, administration, logistics, and distribution and branding fronts for the merged entity. 

Currently, ACC trades at about $130-140 a tonne on the basis of replacement costs, and Ambuja at $150-160 a tonne, based on CY17 estimated capacities, way lower than two comparable peers UltraTech and Shree Cement, respectively. Given the likely gains from the merger and thereafter, the valuations of ACC and Ambuja should catch up. Arora says prima facie the merger should be more beneficial for ACC.