Cement maker ACC equity value sees sharp fall after Adani acquisition

A big valuation gap has opened up between ACC and its parent Ambuja Cements post their acquisition by the Gautam Adani group in September 2022. ACC, India’s oldest cement-maker is now trading at less than half the valuation ratio of Ambuja Cements. By contrast, prior to their acquisition, the two companies traded at similar valuations.

 

ACC is trading at a trailing price-to-earnings multiple of around 15X — less than half Ambuja Cements’ trailing earnings multiple of 32.6X as on Thursday. Similarly, ACC is trading at a price-to-book value ratio of 2.9, nearly 25 per cent lower than Ambuja Cements’ current P/BV ratio of 3.9.

 

ACC and Ambuja Cements were acquired by Adani group in September 2022 from LafargeHolcim Group. Ambuja Cements currently holds a 50.05 per cent stake in ACC, while the Adani family owns another 6.64 per cent through two of their investment firms. By comparison, the Adani family holds a 67.57 per cent stake in Ambuja Cements.

 

ACC accounts for nearly half of Ambuja Cements’ consolidated revenue and profit.

 

ACC closed with a market capitalisation of ₹35,102 crore on Monday, reporting a consolidated net profit of ₹2,344.7 crore in the 12 months ending June this year (Q1FY26). Ambuja Cements on the other hand closed with a market capitalisation of around ₹1.41 trillion on Friday, with a consolidated net profit of ₹4,293 crore during the same period.

 

ACC’s discounted valuation is due to a steady decline in its market capitalisation in the last three years against a rally in Ambuja Cements’ share price. ACC’s market capitalisation is down 22 per cent since September 2022 against a 37 per cent rise in Ambuja Cements’ market capitalisation in the same period.

 

“ACC is trading at discounted valuation compared to Ambuja Cements even though its operational and financial performance has been largely in line with the latter,” said G Chokkalingam, founder and CEO of Equinomics Research and Advisory.

 

The valuation gap is a two-year old phenomenon, prior to which ACC used to trade at par with or even at a premium to Ambuja Cements. For example, ACC traded at a trailing price-to-earnings multiple of 25.6 times on average between December 2010 and June 2023. In this period, Ambuja Ce­m­ents traded at a trailing P/E multiple of 25.8X, only a small discount to ACC's valuation.

 

Similarly, ACC traded at a trailing price-to-book value of 2.9 on average between December 2020 and September 2023, marginally higher than Ambuja Cements’ price-to-book value of 2.7 on average during the same period.

 

ACC is trading at a discount to Ambuja even as its revenue and earnings growth stays largely at par with that of its parent. In the last three years, ACC net sales have grown at a compounded annual growth rate (CAGR) of 10.7 per cent compared with a 6.1 per cent CAGR reported by Ambuja Cement. In the same period, ACC’s consolidated net profit has expanded at a CAGR of 18.7 per cent, compared with a 20.7 per cent CAGR for Ambuja Cements.

 

ACC however beat Ambuja Cement with a return on net worth (RoNW) of 11.4 per cent on average in the last three years, compared with Ambuja Cements’ 10.8 per cent. A company with higher RoNW over a period of time has the ability to grow faster without having to resort to external financing.

 

Some analysts cite Ambuja Cements’ aggressive inorganic growth plans to explain its premium valuation. Post-acquisition by the Gautam Adani group, Ambuja Cements has embarked on an aggressive acquisition-led growth strategy. In the last two years the company has acquired three cement companies — Penna Cements, Sanghi Industries and Orient Cement — in a bid to close the capacity gap with industry leader Ultratech Cements.

 

“Ambuja’s consolidated cement capacity has risen by 30 per cent since FY24-end, primarily led by inorganic growth. However, most of the company’s organic grinding unit expansions are witnessing delays and an efficiency push is yet to materialise,” write analysts at Motilal Oswal Financial Services in a recent report. The brokerage has a buy rating on the stock. By comparison, it downgraded ACC to neutral, post its Q1FY26 results.

 

The inorganic growth push has come at the cost of equity dilution, a contraction in return on net worth and a cut-back in dividend payouts. Analysts at Motilal Oswal Se­c­urities flagged a sharp hike in re­lated-party transactions at Ambuja Ce­ments in FY25 as the firm aims to improve process-efficiency and leverage group synergies.