Ambuja Cements’ announcement that it would acquire Hyderabad-based Penna Cement Industries could be the Adani Group company’s first step for wider inorganic expansion, according to analysts.
Citing media reports, analysts at Nuvama Institutional Equity said Adani Group was preparing a war chest of $3 billion to acquire cement companies and become a leader in the sector in three to four years.
Saurashtra Cement, Vadraj Cement, and the cement business of Jaiprakash Associates are companies the group could seek.
“We believe that further acquisitions are indeed possible considering Ambuja Cement’s strong balance sheet,” said the brokerage in a note with a ‘buy’ rating for the company and a target price of Rs 767.
Ambuja Cements’ share on Friday (June 14) hit a record high of Rs 690 on the BSE, rising 3.8 per cent in intraday trade.
It ended 1.9 per cent higher at Rs 677 apiece as against a 0.24-per cent rise in the benchmark BSE Sensex index.
Ambuja said on Thursday (June 13) it has entered into a binding agreement to acquire Penna Cement at an enterprise value of Rs 10,400 crore (cash consideration), mainly funded through internal accruals.
The deal is expected to be completed in three or four months, subject to regulatory approvals.
Penna has operational capacity of 10 million tonnes (mt): 90 per cent in Andhra Pradesh and Telangana and the rest in Maharashtra.
The company has a clinker capacity — a key metric in the cement industry — of 7.3 mt.
Penna has an upcoming grinding capacity of 4 mt and clinker capacity of 3 mt in Jodhpur, Rajasthan.
The plant is expected to be operational in 6-12 months.
Ambuja had a nationwide market share of 13-14 per cent in FY24, but it was just 5-6 per cent in Southern India.
The Penna acquisition would help Ambuja improve its market share in the South by 700-800 basis points (bps), said analysts at Emkay Global.
When capacity additions are completed (20 mt by FY27), the company’s nationwide market share could improve by 200-250 bps, they said.
“With Penna’s acquisition, Ambuja Cements will move to the top-three players’ group in the Southern market.
"Besides, the acquisition reinforces the company’s strong position as growing pan-India market leader,” said analysts at Jefferies.
They have a 'buy' rating with a Rs 735-target.
The increasing market share of major companies may further squeeze smaller players, leading to more mergers and acquisitions.
Ambuja Cements aims to have a manufacturing capacity (consolidated) of 140 million tonnes per annum (mtpa) by FY28 from 78.9 mtpa now.
It is running expansion projects of 20 mtpa across regions to reach 100 mtpa capacity by FY26.
The company’s Board has approved a 2.25 mtpa clinker unit in Mundra in Gujarat and 17 grinding units (2.4 mtpa each) at different places in the country (including 4 mtpa proposed at Godda, Jharkhand).
Land acquisitions and statutory approvals for these projects are in progress.
Ambuja Cement’s consolidated sales volumes in FY24 grew around 8 per cent year-on-year (Y-o-Y) to 59.2 mt.
Its cement capacity utilisation stood at 82 per cent compared to 81 per cent in FY23.
Total capital expenditure (standalone) stood at Rs 2,000 crore in FY24 compared to Rs 2,100 crore the year before.
“We believe this acquisition will help Ambuja Cements move closer to its long-term growth target of 140 mt capacity by CY28.
"Additionally, capacity augmentation would strengthen its position in India, likely making it a key beneficiary of demand prospects.
"However, due to the teething issues at Penna Cement plants and the regional mix, which would tilt towards the surplus market of South India, the acquisition may be margin-dilutive in the medium term,” according to analysts at Elara Capital.
“Given the competitive intensity in South India in the medium term, the asset may earn return ratios similar to cash yield and thus, may be EPS-neutral. We reiterate ‘accumulate’ rating with a target price of Rs 655,” they said.
