An updated version of this story based on new open offer dates is available here.
In May 2022, Adani acquired Swiss major Holcim’s India operations giving it a controlling stake in ACC and Ambuja cement. The Swiss major Holcim has 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 shares directly in ACC making it the parent company of India’s two major cement companies.
According to the SEBI guidelines, the acquirer needs to make a mandatory offer to the existing shareholders to the extent of 26 per cent of outstanding shares. The offer price for Ambuja Cements has been announced at ₹385 per share and for ACC is ₹2,300 per share. This represents a premium of 4 and 6 per cent respectively to the prevailing share price of Ambuja and ACC.The last date to tender these shares is July 19,2022.
Demand outlook
The growth prospects for cement in the coming days look relatively positive. The growth is expected to be led by the infra segment accounting for nearly 25 per cent and the increased capex push by government is also expected to drive demand. In addition, the retail housing projects, including rural housing are expected to pick up. According to the most recent Knight Frank India survey, the sales of residential units in India reached a nine-year high of 158,705 units during the first half of calendar year 2022 across the top eight cities, including Mumbai, National Capital Region (NCR), Bengaluru, Pune, Chennai, Hyderabad, Kolkata, and Ahmedabad.
Profitability under pressure
Although prospects of the industry looks good, the profitability is something to look at. The operating margins of the companies have been under pressure for some time due to steep rise in fuel costs. The EBITDA margin of ACC fell 13.1 percentage points in June 2022 over June 2021 and settled at 9.7 per cent. The EBITDA margin of Ambuja Cements in March 2022 quarter was 18.4 per cent, a decline of 5.7 percentage points over March 2021 quarter. Similarly, Ultratech reported EBITDA margin of 20.34 per cent in March 2022 quarter, which is down 6 percentage points from March 2021.
While input commodity prices have cooled off in recent weeks, what matters to profitability is how this trend will be in the medium term. Depreciating rupee is also a factor, making commodities import more expensive. Thus, the turnaround in profitability margins will depend on the dynamics of the Russia-Ukraine war and trajectory in the USD. The progress on this front requires a wait and watch approach. Till there is clarity on this, the cement stocks can remain under pressure.
Should you tender?
ACC is currently trading at a forward P/E of 21.7x (five-year average is 21.6x), while Ambuja Cements at 23.8x (5 year average at 22.3x). Both these stocks are trading inline to slight premium to historical valuations. ACC is trading at around ₹2,170 per share, while the offer price is ₹2,300 amounting to nearly 6 per premium and Ambuja Cements is trading at ₹370 and the offer price being ₹385 represents a premium of 4 per cent.
Seeing the cost inflation scenario causing a rise in input costs, margins are likely to remain under pressure. Stocks are unlikely to see any sustained appreciation till cost pressures come under control. Any impact to demand due to spill over effects of global slowdown is also a factor to consider. In this context, it can be a prudent for investors to tender the shares in the offer.