Adani-Holcim deal: Analysts expect Ambuja and ACC to merge in medium-term

Adani-Holcim deal: The merger of Ambuja Cement and ACC will help Adani Group rationalise a lot of fixed cost quotients at both these entities, analysts said

After billionaire Gautam Adani's acquisition of Swiss cement major Holcim's stake in Ambuja Cements and its subsidiary ACC for $10.5 billion (around Rs 81,361 crore), analysts believe the next logical step might be to merge the two companies, although only in the medium-term. Besides, other cost and expansion benefits may also emerge in the medium-to-long term, they say.

"Having acquired some of the jewels of the Indian cement industry, Adani may consider the merger of Ambuja Cement and ACC as it will help them rationalise a lot of fixed cost quotients at both these entities," said Vaibhav Agarwal of Phillip Capital.

Sumangal Nevatia and Prayatn Mahajan of Kotak Institutional Equities concurred and said that Adani could accelerate growth plans, invest in various cost saving projects, and look to merge both the entities in the long term.

"The Ebitda/ton of ACC-Ambuja is Rs 250-300/ton lower than Ultratech Cement and the gap can be covered by Adani through Rs 125-150/ton synergy benefit from eventual merger of the two companies, Rs 50-60/ton saving from existing royalty payment (1 per cent of sales) to Holcim, and investments in cost-saving projects like waste heat recovery system (WHRS). In addition to the above margin expansion opportunity, Adani could reach 100 mtpa capacity through brownfield capacity at an attractive $80-90/ton," they said.

Moreover, while Ambuja and ACC have always denied brand consolidation despite talking about production-related synergies, analysts opine the same can lead to cost optimisation gains through supply-chain improvements as only 40 per cent of the gross revenues to cement industry attribute to production cost and rest is all a part of the supply-chain equation.

On Sunday, the Adani family, through an offshore special-purpose vehicle, announced that it had entered into definitive agreements for the acquisition of Holcim Ltd's entire stake in Ambuja Cements and ACC.

Holcim owns 63.19 per cent in Ambuja Cement and 4.48 per cent in ACC. Ambuja Cement, in turn, owns 50.05 per cent in ACC. The combined current cement capacity of Ambuja and ACC is 67.5 metric tonne with both the companies having expansion plans to increase its cement capacity to 80 mt in two-three years, and 100 mt in the medium-term.

The Adani family will make an open offer to buy 26 per cent in these two companies from non-promoter shareholders, as per Sebi's norms.

The acquisition at Rs 385/share for Ambuja Cement and Rs 2,300/share for ACC is at 7-9 per cent premium to Friday's closing price. Valuation assigned for ACC works out to be $132/t; whereas valuation assigned for Ambuja works out to be $226/t (assuming 20 per cent HoldCo discount for its holding in ACC). For the combined entity, EV/t works out to be $168/t, showed an analysis by Motilal Oswal Financial Services.

PODCAST: Why are top Indian companies vying for Holcim's India assets Ambuja and ACC 

On the bourses, ACC rallied 8 per cent to Rs 2,288, while Ambuja Cements rose 5 per cent to Rs 377.5 on the BSE in Monday's intra-day trade before closing 3.7 per cent (Rs 2,192) and 2.6 per cent (Rs 368) higher, respectively. In comparison, the benchmark BSE Sensex closed 0.34 per cent up.

That said, the deal may also not result in immediate gains for the two companies as Adani may not chase growth capex immediately if it is a leveraged buy-out, MOFSL said.

"Moreover, Ambuja and ACC are already operating at high utilisation levels. Thus, Adani's takeover is unlikely to result in immediate improvement in output levels or efficiency at both these companies," said Gaurav Dua, Head – Capital Market Strategy at Sharekhan by BNP Paribas.

From an investment view point, analysts expect ACC to see higher re-rating as the stock has, traditionally, been a cheaper bet. MOFSL has a BUY rating on ACC with a target price of R 2,485 and a NEUTRAL rating on Ambuja with a target of Rs 350.

Phillip Capital has upgraded target multiples for ACC from 13x to 15x, and for Ambuja from 16x to 18x. "We revise target to Rs 2,850 (from Rs2,550) for ACC and maintain Buy. We also upgrade Ambuja to Buy with a target of Rs 440 (from Rs 410/Neutral)," it said.