In May 2022, Adani Group bagged the deal of acquiring Swiss major Holcim’s India operations, giving it a controlling stake in ACC and Ambuja cement. The deal involves Adani Group acquiring Holcim’s 63.06 per cent stake in Ambuja (which also holds 50.05 per cent stake in ACC), as well as Holcim’s direct 4.48 per cent stake 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 0.65 percent and discount of 3 per cent respectively to closing price as on August 25. Adani has got the required statutory approvals now and the open offer for ACC and Ambuja will start on August 26, 2022 and close on September 9, 2022. 

Should you tender? 

While Adani Group has made the acquisition on its expectations for long term outlook for the cement sector in India, investors need to note that profitability is currently under pressure due to steep rise in fuel and other input costs. In the last six months i.e., from the start of Russia-Ukraine war, the spike in energy prices has had a far reaching effect. This rise in prices has exerted a toll on the margins and profitability, and all the players in the industry have been affected with it.

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Historically, power and fuel prices used to be 20-25 percent of sales, but in Q1 FY23, power and fuel costs have surged to 25-35 per cent of sales. However, in the last six months, the stocks of ACC and Ambuja have given positive returns and outperformed their peers.. The Adani deal and open offer expectations have buoyed the two stocks.  

ACC is currently trading at a one year forward P/E of 24.1x (vs five year average of 21.4x) and EV/EBITDA of 13.3x (vs 10.9). Ambuja Cements is trading at one year forward PE of 27.1x (vs 22.2x) and EV/EBITDA of 13.1x (vs 9.5). Both are trading at a good premium to historical valuations on multiple metrics at a time when profitability is under pressure. Any potential impact to growth prospects due to global slowdown and its spill over effects on India also need to be factored. 

As mentioned above, with both ACC and Ambuja now trading at or around the open offer price, there is no scope for any arbitrage opportunity in tendering shares. There may not be much steam left given the current macro environment, with opportunity from open offer also fully factored. Hence, it appears prudent for investors to book profits in both stocks, given expensive valuations and headwinds currently faced by the industry.  

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