Operational gains for Ambuja Cements, ACC

Though the Ambuja stock may face heat due to cash outflow, there are long-term gains

Initial reactions to the Holcim group’s move to simplify the ownership structure of its subsidiaries in India — ACC and Ambuja Cements — don’t sound favourable. Some experts believe the Ambuja stock could come under pressure in Thursday’s trade. However, there are gains for the two cement makers and deal valuations also look fair, with a minimal earnings impact for Ambuja.

Though Ambuja Cements would pay Rs 3,500 crore for a 24 per cent stake in Holcim India Private Ltd to its foreign parent Holcim and issue 584 million shares to the latter for the remaining 76 per cent, it would gain 50.01 per cent stake in ACC. At face value, the deal looks in favour of Holcim, which would see its stake in Ambuja Cements rise from 51.71 per to 61.39 per cent. But Ambuja would end up owning about 30 million tonnes (mt) of ACC’s operational cement capacities.

The replacement cost for setting up new cement capacity is $135-150 a tonne. The deal effectively values ACC’s capacities at $110-120 a tonne. While ACC’s plants aren’t new, these bring on board a strong brand and a profitable business. Also, ACC is virtually debt-free. For Ambuja, the deal is earnings (earnings per share)-neutral from the beginning. (LONG-TERM BET)

Ambuja’s management says there are operational gains for the two companies. On the logistics and supply chain fronts, the warehouses, as well as clinker supplies of either company, could be shared. Though the brands and marketing teams would operate independently and there are no plans to merge the two entities, ACC and Ambuja would optimally use their capacities to cut costs. The Ambuja management sees synergies leading to an addition benefit of Rs 900 crore ($150 million) through the next two years.

From the earnings perspective, too, Ambuja would benefit from consolidation of ACC profits, as it would end up holding 50.01 per cent stake in the latter. Considering this, as well as the reduction in other income due to Rs 3,500 crore of cash outflow and the expected increase in equity capital, the overall impact on earnings for Ambuja would largely be neutral.