Midcap cement companies, facing tepid growth prospects and low offtakes, are on a tear after the sector’s second largest player -- Ambuja Cements -- announced a Rs 10,422-crore buyout of smaller rival Penna Cements in a bid to consolidate its ranking and aim for the top slot.
Business Today tracks 33 listed cement players on Dalal Street out of whom 26 were trading with gains of between 1-7 per cent. The sector’s top gainers included midcaps and small caps such as Shiva Cement, Sanghi Industries, Nuvoco Cement, Deccan, Sagar Cement and India Cements.
"The midcap cement sector is likely to go through a bout of consolidation as smaller players are unable to scale up capacity and are facing pricing pressure from larger players,” Mayuresh Joshi, head of research at William O`Neil Securities, told Business Today. Potential targets include Orient Cement, India Cement and Sagar Cements.
Ambuja Cements, the flagship cement company of the Adani Group, has readied a $3 billion dollar war chest to buy out smaller rivals and take a shot at being the largest cement player in India, where infrastructure spending has been the cornerstone of strong GDP growth over the last 3-5 years.
The diversified Adani Group also owns cement giant ACC Ltd. Together, ACC and Ambuja have an installed cement capacity of 79 million tons compared with the sector leader – UltraTech Cement, which has an installed capacity of 152.7 million tons. Both players are in the market to soak up smaller rivals and add to organic growth.
Ambuja is moving towards its target capacity of 140 MTPA by 2028. The acquisition of PCIL, via internal accruals, has 14 MTPA capacity in Andhra Pradesh, Telangana, and Rajasthan. Ambuja informed shareholders. This buyout Will improve Adani Cement’s market share pan India by ~2 per cent, south India by ~8 per cent.
Analysts are enthused with the prospects of Ambuja Cements, as Penna’s acquisition was done at a lower EV/Tonne, a key metric in the cement space, compared with the previous takeover in the $30 billion annual sales sector.
"Adjusting for surplus clinker, the Penna deal is valued at an EV/tonne of ~USD 79 (~INR 6,595), in line with brownfield capex cost but lower than the recent M&A deal in South India,” Brokerage Elara Capital said in a note to clients. "The last major acquisition in South India was when in November 2023, UltraTech purchased the cement business of Kesoram Industries (valued at an EV/tonne of ~USD 91 or ~INR 7,590).”
Centrum Broking gave a double upgrade to Ambuja Cements – changing its rating to BUY from SELL and raising the target price to Rs 775 from Rs 560 earlier.
"We believe Ambuja will deliver superior volume growth and margins over the next 4 to 5 years. The risks are delay in capex and commodity shocks,” analysts Mangesh Bhadang and Sanjit Tambe at Centrum Broking said in a note to clients.