Adani Group announced its acquisition of Sanghi Cements on August 3, 2023; through its flagship cement arm Ambuja Cements, Adani Group entered into a share purchase agreement with Sanghi Industries. Ambuja Cements will acquire 14,65,78,491 equity shares of Sanghi Industries which is 56.74 per cent of voting share capital, and the company will also make an open offer for 26 per cent shares, i.e., 6,71,64,760 equity shares at the price of ₹114 per share, which is at 7.8 per cent premium to current market price. The Enterprise Value of the deal is ₹5,000 crore. The deal will be funded from internal accruals of Ambuja cement.

Sanghi Industries Limited (SIL) has a clinker capacity of 6.6 MTPA (million tonnes per annum), a cement capacity of 6.1 MTPA and limestone reserves of 1 billion tonnes. The EV/ton of the deal comes to ₹ 8196.7 or $99. In May 2022, Adani acquired Ambuja and ACC from its Swiss parent Holcim group and forayed into the cement business, becoming the second-largest cement producer overnight. Adani Group had inked the deal with Holcim at an EV/ton of $157. According to a JM Financial report, in the last 6-7 years, major acquisitions of the cement companies were made at an EV/ton of $90 (including the Dalmia-Jaiprakash deal of December 2022).

The current EV/tonne of the company is ₹6,909, which means that Adani is paying a 19 per cent premium at ₹8,196.7 per tonne to acquire SIL. The EV/tonne of SIL Acquisition is at a significant premium to its comparable peers (in terms of capacity). The EV/ton of Orient cement (8 MTPA capacity) is ₹4043.67 and the EV/tonne of Mangalam cement (4.06 MTPA capacity) is ₹3,091.8. SIL’s acquisition EV/tonne is at a premium of 103 per cent and 165 per cent, respectively.

What is in it for Adani?

The capacity of Adani Cement will be 73.6 million tonnes per annum post this acquisition. Adani Group stated that it plans to increase the capacity of Sanghi Industries to 15 MTPA in the next two years. This aligns with the conglomerate’s strategy to have 140MTPA cement capacity by 2028. SIL’s Sanghipuram unit is India’s largest single-location cement and clinker unit by capacity, with a captive jetty and captive power plant.

Sanghi Industries Limited (SIL) has been in financial trouble for some time now. India Ratings and Research downgraded Sanghi Industries and its NCDs on July 5, 2023. A Nirmal bang Report dated March 3, 2023 stated that Sanghi Industries owes its vendors ₹150 crore in total and several companies have terminated their previous business dealings with SIL.

The premium being paid by Adani Group in this deal is not justified prima facie but might make sense if it serves its strategic goals. In the press release, the company stated that with the ongoing capacity expansion of the acquisition of Sanghi Industries, the Adani Group’s capacity will be 101 MTPA by 2025. 

In addition to the capacity, another factor which may have encouraged the Adani Group to go for the deal may be the captive port at Sanghipuram. Adani group stated that this port will be expanded to handle 8000 DWT (deadweight tonnage). In addition, bulk terminals and grinding units will be created along the western coast to enable the movement of clinker and cement through the sea route at a lower cost. SIL already has bulk terminals at Navlakhi Port in Gujarat and Dharamtar Port in Maharashtra. SIL also has a network of 850 dealers, with a market presence in Gujarat, Madhya Pradesh, Rajasthan, Maharashtra, and Kerala.

Ambuja Cement is a net cash company whose one-year forward PE is 31.6x against its 5-year average of 23.1x. The company’s one-year forward EV/EBITDA is 14.3x against a 5-year average of 10.1x. This acquisition is at a premium for Adani, and what benefits it reaps from this acquisition will be a key monitorable in upcoming periods.