Ambuja Cements Rating – Decline: Contract growth plans are likely to be encouraged.

Adani Group has entered into a final agreement to acquire Holcim’s shares in ACEM-ACC. This investment will launch an open offer in both ACEM and ACC and the contract may expire in 6-9 months. The implied assessment is consistent with the historical average on a trailing basis. We hope that Adani will accelerate its growth plans, invest in various cost-effective projects and try to integrate the two companies in the long run. Adani officials are less likely to be given a chance to acquire more market share from ACEM-ACC but we do not see any risk in market price discipline.

Adani Group wins Holcim’s stake in ACEM-ACC
Holcim has signed a binding agreement with Adani Group to acquire its business in India, including a 63.11% stake in Ambuja Cement, which owns 50.05% interest in ACC, as well as a 4.48% direct stake in ACC. Acquisition of Rs.385 / share for ACEM and Rs.2,300 / share for ACC at 7-9% premium from current market price. The implied valuation stands at 12.5X / 10X EV / Ebitda and $ 170/120 / ton and this is consistent with the average quality of ACEM / ACC over the last seven years. The transaction will trigger an open offer for a 26% minority stake in both companies. The total deal size, including the same price for the open offer, comes to ানির 10.6 billion for Adani.

The proposed diversion is consistent with Holsim’s business strategy to gradually build a solution business and move away from traditional cement production. Holcim aims to expand Group Net Sales to 30% solutions and products from 8% / 15% on CY2020 / 21.

Holcim has valuable integrated assets and a pan-India portfolio
In India, the combined capacity of ACEM and ACC could be 73 mtpa in CY2023, 12% of the market capacity and the presence in the whole of India including the combined resources supported by limestone. Ebitda / ton of ACC-ACEM is less than TC 250-300 / ton of UTCEM and (i) the final merger of ACC-ACEM can fill this gap with Rs.1125-150 / ton of synergy facility, (ii) From Rs.50-60 / ton royalty payment (1% of sales) to investment in cost-saving projects like Holcim and (iii) WHRS. In addition to the opportunity to increase margins, Adani can reach 100 mtpa power through Brownfield capacity at an attractive ~ 80-90 / ton.

Adani may be aggressive for growth but is unlikely to break market discipline
Over the past decade, Holcim India has lost power and volume market share, an opportunity that is unlikely to continue with Adani. We expect Adani to accelerate toward 100-mtpa capacity by capitalizing on various low-cost brown-field expansion opportunities. Further, Adani could look more actively for more inorganic opportunities. However, given the high acquisition costs and potential leverage for funding, we do not expect Adani to quickly break market discipline in order to gain market share.

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