Cement industry consolidation continues and at a premium value despite a not-so-strong sector outlook. The anticipated pick-up in cement prices has yet to materialise, with hopes resting on the second-half of the fiscal year.

Adani Group company - Ambuja Cements, has entered into a share purchase agreement with the promoters and a few other shareholders of Orient Cements, a CK Birla Group company, to acquire a 46.8 per cent stake. This will trigger an open offer wherein Ambuja Cements plans to acquire an additional up to 26 per cent stake from the public. The price offered to the selling shareholders and the open offer is fixed at 394.5 per share, which is at a 12 per cent premium to Orient’s Monday closing share price. This values the company at a market capitalisation of ₹8,100 crore.

Premium value

Orient Cement has an operational capacity of 8.5 MTPA (million tonnes per annum). This implies a deal valuation at EV/tonne of around $113, which is at a premium to mid-sized cement company valuations, which usually range from $90-100 per tonne.

The recent deal flow also transpired in that range with a few exceptions. Ultratech acquired Kesoram Cements at $80 per tonne for the 10.8 MTPA capacity and Ambuja Cements acquired a South based player, Penna Cements, with 14 MTPA capacity at $89 per tonne.

Ultra Tech’s recent acquisition of India Cements was made at $90 per tonne in the first tranche when it made a non-controlling investment. Subsequently it signed a share purchase agreement with promoters of India Cements to become a controlling shareholder by acquiring their stake and also making an open offer at a valuation of $122 per tonne.

The premium paid for Orient Cement could have been driven by three reasons. Firstly, considering the consolidation spree, mid-sized players began  trading at a premium. Orient stock gained 12 per cent in the last week and 18 per cent in the last month. Secondly, Orient Cement is a profitable and listed cement player. The company reported an 8 per cent revenue CAGR in FY22-24 with moderate EBITDA margins of 14 per cent in FY24. Ambuja Cements reported a 2 per cent revenue CAGR in the period with an EBITDA margin of 19 per cent in FY24. Thirdly, the company has a decent scope to expand to 16.6 MTPA per annum. The company has a concession from the Madhya Pradesh government to set up a 2.0 MTPA Cement grinding capacity and an additional 6 MTPA capacity with a limestone mining lease in Chittorgarh, Rajasthan. This improves Ambuja’s position in South and West markets and anticipated 2 per cent increase in pan-India market share.

Sector Outlook

Cement prices have declined 10 per cent YTD with hopes of revival pinned on the second half of the year. On the volume front, Orient Cement has reported volume decline of 15 per cent YoY in Q1FY25 while Ambuja reported 3 per cent YoY growth in volumes. The results in Q2FY25 are not off to a great start, with Ultra Tech reporting a 3 per cent revenue decline and a 36 per cent YoY PAT decline owing to higher raw material, power and employee costs despite moderate growth in volumes.

Demand and pricing are expected to revive after the monsoon in H2FY24. The impact of higher capacity with a higher consolidation in the industry is also an overhang on cement prices, although this will work to advantage of large players like Ambuja in the long run.

Ambuja Cements plans to add 40 MTPA in the next three years and increase capacity from 100 to 140 MTPA by 2028. Ultratech Cements aims to increase its installed capacity from the current 150 MMT (million metric tonnes) to 200 MMT by the end of FY27..

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