News Analysis

Holcim deal: What’s in it for Adani

Vishal Balabhadruni |BL Research Bureau | Updated on: May 17, 2022
Gautam Adani, Chairman, Adani Group with Jan Jenisch, CEO, Holcim Limited

Gautam Adani, Chairman, Adani Group with Jan Jenisch, CEO, Holcim Limited | Photo Credit: Hand-out

Valuation of the combined entity is at a discount to Shree and Ultratech

Shares of ACC and Ambuja are up about 4 per cent on Monday, after Holcim announced sale of its stake in the companies to the Adani Group.

The Swiss major Holcim holds a majority stake in Ambuja Cements with 63.06 per cent holding, while Ambuja, in turn, holds 50.05 per cent stake in ACC. Holcim also holds 4.48 per cent share directly in ACC making it the parent company of India’s two major cement companies.

The offer price was at 7-9 per cent premium to Friday’s closing price of the two stocks, explaining the up move in the stock today.

The offer adds up to a total of ₹50,192 crore. Together with the mandatory open offer for 26 per cent, the deal value works out to ₹81,314 crore, assuming 100 per cent acceptance in open offer (see table).

At the deal price, the EV/EBITDA of the combined entity comes to 13 times. Ultratech Cement (15.83 times) and Shree Cements (18.37 times) are valued higher. In terms of EV/sales too, ACC and Ambuja are at a discount to Shree (5.24 times) and Ultratech (3.41 times). This can partly explained by the fact that EBITDA margins for Shree and Ultratech are higher at 25 per cent and 20 per cent respectively, vis-a-vis ACC and Ambuja that are in mid-to-high teens.

The buyout will catapult the Adani Group, which has interests in ports/logistics, coal and power, to the position of second largest cement producer in the country.  

Ambuja Cements has a capacity of 31 million tons per annum and ACC has 34.45 million tons per annum capacity.

The presence of a large combined entity, which the Adani Group will turn into, is perhaps showing on large peers such as UltraTech (119.95 million tonnes capacity) and Shree Cements (44.4 million tonnes capacity) whose stocks are down 2-3 per cent in trading today.

What will Adani do?

Like Ultratech Cement, the acquisition will give Adani a presence across India. ACC and Ambuja have existing capacities in West and Central India. Ambuja has expansion plans in East (West Bengal, Bihar, Chhattisgarh) to the extent of 10 MTPA. The eastern region has been enjoying higher demand and pricing power. ACC is setting up capacities in Central and North India to the extent 7.5 mtpa.

At present, UltraTech is the market leader in terms of capacity.

Capacity additions by the Adani group will be monitored, given its interests in the user industries of cement. Also, cost efficiencies from synergies that the Adani Group’s other businesses (in terms of access to power and coal) will be keenly watched.

While tailwinds in the form of pick-up in demand from housing and infra segments are present, cement players have been facing headwinds in recent times, with high input and power/freight costs affecting profitability. Price growth is what has helped to an extent.

For instance, in the Q4 of FY22, ACC’s topline saw a modest rise of 3 per cent year-on-year in revenue, despite a fall in cement volumes. However, net profit for the quarter fell 30 per cent due to cost pressures.

The company saw a steep decline in margins, with the EBITDA margin reducing to 14.3 per cent in March 2022 from the 19.9 per cent levels a year ago.

Similarly, volumes of UltraTech were at best flat, but net sales grew 9.3 per cent y-o-y supported by price increases. EBITDA margins were also pounded due to cost pressures.

Published on May 16, 2022
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