Ambuja Cements Penna Cement acquisition: Adani group firm,
Ambuja Cements' approval to acquire Hyderabad-based Penna Cement could likely be the company's first step towards a wider inorganic expansion, believe analysts.
Citing media reports, analysts at Nuvama Institutional Equity said the Adani group is preparing a war chest of roughly $3 billion to acquire multiple cement companies in its quest to become a leader in the cement space over the next three–four years.
The probable companies mentioned in reports are Saurashtra Cement, Vadraj Cement, and the cement business of Jaiprakash Associates.
"We believe that further acquisitions are indeed possible considering Ambuja Cement's strong balance sheet," the brokerage said in a note with a 'Buy' rating and a target price of Rs 767.
On the bourses, Ambuja Cements share price hit an all-time high of Rs 690 on the BSE, rising 3.8 per cent in the intraday trade. It ended 1.9 per cent higher at Rs 677 apiece as against a 0.24-per cent rise in the benchmark BSE Sensex index.
The Penna deal
On Thursday, Ambuja Cements said it has entered into a binding agreement to acquire 100 per cent stake in Penna Cement at an enterprise value of Rs 10,400 crore (cash consideration), mainly funded via internal accruals. The transaction is expected to be consummated in three-four months, subject to regulatory approvals.
Penna, according to the company, has operational capacity of 10 million tonne (mt) (clinker 7.3 mt) at present, of which 90 per cent is situated in Andhra Pradesh and Telangana, with the balance in Maharashtra.
Besides, Penna has an upcoming grinding capacity of 4 mt and clinker capacity of 3 mt. The plant is expected to be operational in 6-12 months.
Analysts believe Penna's acquisition will help Ambuja improve its market share.
At present, Ambuja’s pan-India capacity market share stands at 13-14 per cent as of financial year 2023-24 (FY24), with share in the southern market being the lowest at 5-6 per cent.
The said acquisition, they said, would solidify its presence in the highly fragmented, fast-growing southern markets.
The acquisition, analysts at Emkay Global noted, would help the company improve its market share in the South by 700-800 basis points (bps). Following the completion of the announced capacities (20 mt by FY27), the company's pan-India capacity market share could improve by 200-250 bps ahead, they added.
"With Penna's acquisition, Ambuja Cements will move to the top-three players' group in the Southern market. Besides, the acquisition reinforces the company's strong position as growing pan-India market leader," analysts at Jefferies noted. They have a 'Buy' rating with a Rs 735-target.
The increasing market share of major players, they added, may squeeze smaller players further, thereby increasing mergers and acquisitions (M&As) in the sector.
In-line with long-term plans
Penna Cement's acquisition comes amid Ambuja Cements' aim to reach a capacity target (consolidated) of 140 mtpa by FY28 as against 78.9 mtpa at present.
The company has already initiated capacity expansion projects of 20 mtpa across regions to reach 100 mtpa capacity by FY26-end.
Besides, the Board has also approved a 2.25-mtpa clinker unit in Mundra, Gujarat (calcium hydroxide process), and 17 grinding units (2.4 mtpa each) at different locations across the country (including 4 mtpa proposed at Godda, Jharkhand).
Land acquisitions and statutory approvals for these projects are also in progress.
In FY24, Ambuja Cement's consolidated sales volumes grew ~8 per cent year-on-year (Y-o-Y) (like-to-like comparison) to 59.2 mt. The company's cement capacity utilisation stood at 82 per cent versus 81 per cent in FY23.
Its total capex (standalone) stood at Rs 2,000 crore in FY24 as against Rs 2,100 crore in FY23.
"We believe this acquisition will help Ambuja Cement move closer to its long-term growth target of 140 mt capacity by CY28.
Additionally, capacity augmentation would strengthen its position in India, likely making it a key beneficiary of demand
prospects. However, due to the teething issues at Penna Cement plants and the regional mix, which would tilt towards surplus market of South India, the acquisition may be margin-dilutive in the medium term," pointed out analysts at Elara Capital.
Given the competitive intensity in South India in the medium term, the asset may earn return ratios similar to cash yield and thus, may be EPS-neutral. We reiterate 'Accumulate' rating with a target price of Rs 655, based on 18x March 2026E EV/EBITDA, it added.