ACC-Ambuja Cements: Brokerages Weigh In On Adani's Cement Ambitions; Shares Rise
Here's what brokerages made of ACC-Ambuja's board rejig and fundraising plans.
As the acquisition of ACC Ltd. and Ambuja Cements Ltd. formally concluded on Friday, making Adani Group the second-largest cement maker in the country, brokerages weighed in on the new appointees to the company boards, fundraising plans and the road ahead for the sector.
While billionaire Gautam Adani has been appointed as chairman on Ambuja Cements' board, his elder son Karan Adani will take charge of ACC Ltd. Karan will also be a non-executive director at Ambuja Cements.
Vinay Prakash and Arun Kumar Anand were appointed as non-executive, non-independent directors at ACC. Sandeep Singhi, Nitin Shukla and Rajeev Agarwal were named as independent directors. Sridhar Balakrishnan has been re-designated as whole-time director and chief executive officer from managing director and CEO earlier.
Ajay Kapur has been appointed as whole-time director and CEO of Ambuja Cements. Vinod Bahety was named as chief financial officer of ACC and Ambuja Cements.
On Friday, Ambuja Cements' board approved raising Rs 20,000 crore through issue of convertible warrants to Harmonia Trade and Investment Ltd. The cement maker will issue 47.74 crore warrants representing a 19.39% stake in the company, it had said in an exchange filing.
The issue price of the convertible warrants was set at Rs 418.87 apiece.
Chairman Adani, in an event, said the group aims to expand its capacity to 140 million tonnes in five years from about 70 million tonnes currently.
Shares of Ambuja Cements rose as much as 9.35% to Rs 565 apiece, while that of ACC gained 3.94%.
Of the 47 analysts tracking Ambuja Cements, 19 maintain 'buy', 16 recommend 'hold' and 12 suggest 'sell'. The return potential of the stock is -27.9%.
Of the 46 analysts tracking ACC, 23 maintain 'buy', 12 recommend 'hold' and 11 suggest 'sell'. The return potential of the stock is -15.4%.
Here's what brokerages made of the board rejig and fundraising plans...
Kotak Institutional Equities
Downgrades Ambuja Cements to 'sell' from 'reduce', raises fair value to Rs 440 from Rs 345.
Finds valuations rich after the recent rally.
Ambuja-ACC’s cash reserve of Rs 11,000 crore and equity infusion of Rs 20,000 crore would empower management with enough ammunition to pursue organic and inorganic growth, and invest in cost improvement.
The group can reach 105-110 MTPA capacity organically in the next three-four years at $80-90/ton. Further, we see a potential of Rs 250-300/ton reduction in costs, led by lower energy costs, efficient logistics management, better raw material procurement and lower overhead cost.
There could be an emerging supply risk for the sector led by record low leverage and aggressive growth ambitions of the leaders. Producers are lining up capacities: 5.5% CAGR in FY2022-26E versus 3.9% CAGR in FY2019- 22.
Sees upside risk to supply, which could dent sector profitability. A few companies could drive sector consolidation; however, large bid-ask spreads make timelines and success uncertain.
Increases Ebitda for Ambuja by 2%/18% for CY2023/24 and introduce CY2025 earnings, factoring in back-ended cost improvements and growth in CY2022-25.
Upgrades Ambuja to 'buy', raises price target from Rs 400 to Rs 620. Retains 'buy' on ACC, hikes price target to Rs 3,030 from Rs 2,565.
The significant fund infusion at Ambuja Cements is a "big surprise." The current cash balance, internal accruals plus the additional fund infusion by promoters, will give the group enough war chest to scale up new expansions (organically or inorganically), in line with the aspiration to double capacity in 5 years.
While the detailed road map isn't available as of now, from current market positioning perspective, Adani's statement to "become the largest and most efficient cement manufacturer by no later than 2030" is meaningful and disruptive. Both Ambuja/ACC would benefit from synergies with the integrated Adani infrastructure platform, especially in the areas of raw material, renewable power and logistics, focus on ESG, circular economy.
Aligns FY23 to new financial year format, raise FY24/FY25 EBITDA estimates for both Ambuja/ACC—factoring in higher volume growth and Ebitda/tonne assumptions (group related savings to the tune of Rs300/T).
Given the faster growth trajectory for Ambuja under new leadership, we now value Ambuja's consolidated Ebitda at 16x EV/Ebitda, one notch higher than 15x target multiple for UltraTech.
Further, fund infusion by promoters (which we have only partly factored in given lack of details on cash deployment) leaves option-value for higher acquisition-related growth in profitability.
Reiterates Ambuja as preferred play and increases target price to Rs 752 per share. Downgrades ACC to 'hold' at a target price of Rs 2,919, considering relative growth, economic interest of promoters.
Retains preference for large-cap cement and highlight consolidation as theme to gather pace, which could potentially drive-up valuations in select mid cap names.
Ambuja's warrant issue signals that it will be the key vehicle for Adani’s cement foray, implying higher growth /synergy optionality (vs ACC), probability for ACC to be merged into Ambuja (if at all). Ambuja is our preferred pick, despite, higher valuations (vs. ACC).
While the road map is awaited, factoring cash on books + cash flow generation over CY23-24 + infusion from warrants, we expect a Rs 38,000-crore war chest by CY24, implying scope to acquire 50 million tons (at $100/t). We assume company will acquire 39 million tons of assets and add 32 million tons by organic growth by FY26, with cash flow adjusted for incremental organic ($75)/inorganic ($100) capex intensity. Aforesaid assumption reflects 75% of war-chest deployment and 50% of organic growth optionality exercised.
Adani is well-placed to move from third quartile to first quartile of the cost curve as it taps into group synergies of up to Rs 650 per ton. Key components driving synergy gains include fly ash sourcing, improvement in clinker factor; solar, warehouse facilities; freight synergies (sea freight, DFC); commercial coal mining and royalty savings. Our revised target price bakes in Rs 3,000 crore of potential cost synergies at Ambuja, including Rs 1,500 crore at ACC.
Industry profitability (including Ambuja) at risk if not for sanity in organic capacity additions by mills.
Company specific risk: Inability to acquire assets at right price in a timely way; inability to extract group synergies. Group specific risk: inability to re-finance debt at right cost.
Maintains 'underweight' ratings on both ACC and Ambuja.
Change in promoters and organic/inorganic expansion could pave the way for improved margins over time, led by various cost synergies and operating leverage opportunities, but need to wait and see how that plays out.
Over the next couple of years, however, ACC+Ambuja's volume growth will lag larger peers given the high starting point of capacity utilization rates for them.
Moreover, current cost structures for both ACC and Ambuja will keep medium-term profitability in check.
ACC and Ambuja shares have outperformed peers year-to-date and current valuations are not cheap relative to peers, limiting any re-rating triggers and hence upside potential.
The announcement is net positive for the industry in the medium term, reaffirming our view of a multi-year demand upcycle. The industry has consolidated massively since the previous upcycle (2010), and, unlike then, new capacity addition is now concentrated at larger players.
This lowers the risk of unjustified capacity additions in this cycle, in our view, and thereby lowers the risk of price war. This should drive steady improvement in utilization rates, which should translate into higher profitability. However, Ambuja now has the power to drive industry dynamics, and any announcement could create volatility for peers in the near-term.
Remains 'neutral' on ACC and Ambuja both, target prices raised to Rs 2,515 and Rs 530 versus Rs 2,260 and Rs 350.
Commitment of promoters for growing cement business has strengthened after their announcement of fund infusion in this business. We have assumed capacity of Ambuja and ACC to be 88 million tons per annum and 50 million tons per annum, respectively in CY26.
The group has environmental clearance/plans for 25 million tons per annum clinker capacities and the fundraising will help to pursue inorganic growth opportunities too.
Disclaimer: Adani Enterprises is in the process of acquiring a 49% stake in Quintillion Business Media Ltd., the owner of BQ Prime.