Ambuja Cements: High value

Holcim's open offer is being done at 16 times Ambuja Cements' estimated CY07 earnings

Holcim's open offer for Ambuja Cements at Rs 154 works out to a premium of about 29-30 per cent to the average stock price 26 weeks prior to this announcement, and a 16 per cent premium to its price on Thursday.

In terms of valuation, this open offer is being done at 16 times Ambuja Cements' estimated CY07 earnings. This seems like a good valuation compared to Holcim-controlled ACC trading at 14.5 times estimated CY07 earnings, and UltraTech Cement's discounting of 12 times estimated FY08 earnings.

Ambuja Cements had a free float of 61.74 per cent at the end of June 2007. If all the shares are tendered, the 20 per cent open offer would result in an acceptance ratio of about 32 per cent.

If an investor were to buy 100 shares of Ambuja Cements on Thursday at Rs 132 per share, for a total of Rs 13,200, and if he were to tender his shares in the open offer, he would realise Rs 13,904 (32 shares accepted in the open offer and the remainder sold in the open market at Rs 132).

Assuming a cost of finance of 15 per cent till the completion of this transaction, it leaves an arbitrage opportunity of merely 3-4 per cent, point out analysts.

Thus it was no surprise to see the Ambuja Cements stock rising merely 1.15 per cent to Rs 132 on Thursday. Analysts highlight that nearly 73 million tonne of new cement capacity has been announced.

This is expected to result in a surplus of 3 million tonne in the country in FY10 as compared with an anticipated deficit of 9.3 million tonne in FY09 according to analysts, leading to some pressure on cement prices.

Clearly, this open offer provides limited arbitrage opportunity, but investors who bought the stock several years earlier could consider tendering their stock. However, stocks tendered in an open offer are subject to capital gains taxes.

Grindwell Norton: Good show

At Rs 100 crore for Grindwell Norton's 50 per cent stake, the centralised lubrication systems JV Lincoln Helios (India) has valued the company at an enterprise value of 2.44 times sales and 9.1 times operating profit.

For Grindwell, which invested Rs 50 lakh in this business formed two decades ago, this is a good price and a neat profit.

Since this business was not core for Grindwell, it had transferred it to a JV with Lincoln, Germany in 1993. A focused partner has enabled high growth in this business. Since the centralised lubricant systems business is not strategic for Grindwell Norton, the company decided to exit.

According to the Grindwell management, the net profit after capital gains tax will be Rs 78 crore, which will be invested in capex and help it maintain its debt-free status. This money will also be invested towards a 70 per cent stake in a Rs 34-crore JV in Bhutan.

In CY06, the company had divested some of its mutual funds to purchase Orient Abrasives' bonded abrasives business and set up its new office in Mumbai.

In the June 2007 quarter, its top line had grown 14 per cent to Rs 107.3 crore, but operating profit margin declined 220 basis points to 17.8 per cent on account of an increase in raw material and power costs, as well as other expenditure.

At Rs 143, the stock trades at about 15 times CY07 earnings, and should be a market performer.