Ambuja Cements: Adani Group stock may fall sharply, brokerage issues alert, reduces rating and target

Gautam Adani Group Share :Gautam Adani Group’s cement company Ambuja Cement’s stock has recovered significantly from last year’s fall. The stock has strengthened by about 66 percent compared to its 1-year low of Rs 404. On November 1, 2023, the stock was at a price of Rs 404, which is currently around Rs 670. However, brokerage house HSBC has alerted about the further movement of the stock. The brokerage says that recently Ambuja Cement has announced the acquisition of Penna Cement. There are some concerns in this deal, which may put pressure on the company for a few days. Due to this, the stock is expected to fall by about 34 to 35 percent from the current price.

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Brokerage house HSBC has given a Reduce rating for Ambuja Cement’s stock and has given a target price of Rs 440. This is 34 percent down from the current price of Rs 670. The brokerage says that the Andhra Pradesh and Telangana markets are very competitive with the presence of more than 40 cement brands. At the same time, PCIL has limited opportunities for brownfield expansion.

Target to complete acquisition in 3-4 months

On June 13, Ambuja Cement announced plans to acquire Penna Cement Industries Ltd (Penna Cement) at an EV of Rs 104 billion or Rs 10,400 crore. Brokerage HSBC estimates Penna Cement’s EV/tonne to be $100-110 per tonne, which is in line with replacement costs. Penna Cement has an operational cement capacity of 10MTPA, all in Andhra Pradesh and Telangana. Apart from this, Penna Cement also has 4MTPA cement capacity under construction in Rajasthan and Andhra Pradesh. Ambuja aims to complete the acquisition in the next 3-4 months.

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What is positive in this deal?

1. According to brokerage house HSBC, this deal of Ambuja Cement will increase exposure for Ambuja Cement in the growing markets of Andhra Pradesh and Telangana. Currently, Ambuja has limited presence in the southern markets and very little or almost no presence in the Andhra Pradesh markets. While Penna Cement assets are relatively new and efficient.
2. Except 1.8 MTPA capacity at Tadipatri, all other plants are recent and hence their cost structure will be better.
3. Despite a 67% utilisation rate in FY22, Penna’s operating cost per tonne was better than Ambuja.
4. ACC’s price positioning is much better than Penna Cement, which should lead to significant growth in PCIL margins.
5. Upcoming clinker capacity of 3 MTPA in Rajasthan will improve the clinker-capacity ratio for Ambuja in the Northern region.
6. Ambuja can leverage PCIL’s packing terminal network to access new markets in the east coast of India and Sri Lanka.

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What is negative in this deal

1. Andhra Pradesh and Telangana (AP&T) market is very competitive with the presence of over 40 cement brands. The cement capacity in this region is almost 3 times the demand base of 30-35MT. In addition, government infrastructure projects account for a large part of the total demand, often resulting in sharp fluctuations in cement prices and high OPC sales.
2. While sea logistics is a forte of the Ambuja/Adani Group, earlier both Penna Cement and Ramco Cement had failed to serve the east coast markets through sea.
3. PCIL has limited opportunities for brownfield expansion. Penna had limestone reserves of c640MTs as of end-FY21, which is sufficient for existing operations. However, it can only support small expansion (2-3MTPA) in Telangana.
4. Another subsidiary will further reduce the predictability of operational performance.