AMBUJA CEMENTS ANNOUNCED THAT COMPANY WOULD ACQUIRE 100% STAKE OF PENNA CEMENT

News: Ambuja Cements has announced that the company would acquire 100% stake of Penna Cement at an enterprise value of Rs 10,422 crore. Penna Cement has cement capacity of 10 mtpa at present (5.8 mtpa in Andhra Pradesh, 3.2 mtpa in Telangana and 1 mtpa in Maharashtra). Additionally, 4 mtpa of capacity is under construction (2 mtpa each at Rajasthan & Andhra Pradesh), which will be completed within 6-12 months. As per the press release, ~90% of the Penna Cement’s capacity comes with railway sidings and some are supported by captive power plants and waste heat recovery systems. Further, surplus clinker at the Rajasthan plant will support an additional 3 mtpa cement grinding capacity over and above 14 mtpa. The acquisition is expected to be completed in 3-4 months and will be funded by internal accruals.

Views: Acquisition at $90/ton has been in-line with earlier acquisitions in industry and incrementally positive for Ambuja considering the current capex cost of $120/ton with 2-2.5 years of commissioning time. Moreover, operational performance for both Ambuja and ACC would improve led by expected synergies creation (on volumes, raw materials and logistics front). With this acquisition, Ambuja’s total consolidated cement capacity will increase to ~89 mtpa and will improve its Pan India market share by ~2% (to 16% from 14% earlier) and south India market share by ~8%. Post the 4 mtpa of Penna’s capacity expansion and ~20 mtpa of Ambuja’s expansion plan under process, company’s capacity would reach 113 mtpa by FY26E. Ambuja has a target of reaching 140 mtpa of capacity by FY28E through organic and inorganic expansions with Pan India market share of ~20%. With strong balance sheet position, Ambuja is well positioned for aggressive expansions and further strengthening its position. We see this acquisition as a big positive for other mid-sized cement players (like Orient Cement & Sagar Cement which have considerable presence in AP & Telangana) in terms of valuations re-rating.

Impact: Positive