The Hindu Business Line : Gujarat Ambuja Cements: Reject

There are significant advantages in remaining invested in Gujarat Ambuja Cements. Primary is the likely consolidation of Holcim's India operations under one umbrella.

Shareholders of Gujarat Ambuja Cements may avoid the open offer made by the Holcim group of Switzerland. At Rs 90.64, the offer price is well below the market price. Even otherwise, there is a strong case for retaining exposure. The open offer is for 20 per cent of the equity.

The Holcim group had acquired a 14.8 per stake from the promoters of the company; the promoter group now holds less than 9 per cent of the equity and it may possibly participate in the open offer.

This is the only way by which Holcim's stake can rise beyond 20 per cent. In any case, its targeted stake of about 35 per cent is unlikely to be attained.

There is the possibility of Holcim resorting to secondary market purchases to shore up its holding.

FAST-TRACK MERGER

We do, however, expect Holcim to fast-track the merger of its various affiliates in India. For instance, the merger of Gujarat Ambuja Cement and Ambuja Cement India — its assets include a 35 per cent stake in ACC and in excess of 95 per cent in Ambuja Cement Eastern.

Holcim and Gujarat Ambuja jointly own this company. As Holcim has a 67 per cent stake in Ambuja Cement India, a merger could step up its shareholding in Gujarat Ambuja by a few percentage points. A more keenly awaited merger will be the one with ACC. We expect this merger to take place within a year; the more likely course is an earlier completion of the process. Unlike the Gujarat Ambuja group, which steered clear of a merger with ACC to protect the quality and value of its vastly superior cement properties, Holcim has no specific interest in retaining the existing ownership structure. A merger may also raise Holcim's stake and fast-track the payback for its big-ticket investments in India.

The synergy, the cost benefits and the financial clout that a merger will provide could be significant. This combine is well placed to grow its business through acquisitions as well as disciplined capacity creation.

Given its capacity of close to 35 million tonnes, it is unlikely to face any threat to its leadership position either from Grasim or MNC aspirants. If the merger process is initiated, we also expect swap ratio to be done in a manner that will be fair to shareholders.

Life sans merger

Even if the merger process does not take place in the timeline anticipated by us, remaining invested in Gujarat Ambuja will be a paying proposition.

Given the healthy trends in demand growth, superior pricing power in the hands of producers due to the tightening of the demand-supply balance across the country, likelihood of cement prices settling at higher average levels and top-of-the-charts operating efficiency, there will be gains linked to fundamentals.

We expect the ACC-Gujarat Ambuja combine to be one of the more preferred plays in the cement space. The principal risk to our recommendation is a slump in the stock price to less than Rs 90 due to extraneous factors or a sudden deterioration in industry dynamics; the risks of such a trend is low. We will view any major weakness as a buying opportunity.

The open offer, which opened on April 5, closes on April 24. DSP Merrill Lynch is the manager to the offer. The open offer document is available on the SEBI web site (www.sebi.gov.in).

More Stories on : Open Offers | Open Offers | Cement | Gujarat Ambuja Cements Ltd

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page