Ambuja Cements: Acquires Sanghi Cement; value-accretive acquisition

4 Aug 2023 , 12:17 PM

Recommendation: Add; target price: Rs 480

Ambuja Cement (ACL) signed an agreement to buy Sanghi Cement at an EV of Rs50bn (US$100/MT). Analysts of IIFL Capital Services believe the acquisition would be value-accretive, given attractive valuations and Adani’s ability to turn around operations. Immediate target is to improve plant utilisation (28% in FY23) and achieve Ebitda/t of Rs1,000 (Ebitda loss in FY23). The acquisition consolidates Adani’s position in Gujarat and other western coastal regions. In addition, given the availability of land, limestone and ability to service far-off markets – plans are to ramp up capacity from 6mtpa to 15mtpa in 2 years. 

Acquires Sanghi Cement at US$100/MT: 

Ambuja Cement (ACL) signs an agreement with Sanghi Industries to buy latter’s part-promoter stake (56.74% of 72.72%) at Rs114.22/sh (equity value of Rs29.5bn). Debt at FY23-end was Rs15.3bn; this, coupled with inter-company loan from ACL of Rs3bn, would increase total debt to Rs20.5bn. Resultantly, deal is valued at an EV of Rs50bn or US$100/MT. Sanghi Cement is the third largest player in Gujarat (on capacity) after UltraTech and ACL. Nonetheless, the company is confident of securing CCI approval and complete the deal in next 3-4 months. ACL would also make an open offer to acquire 26% stake from minority shareholders. Acquisition will be funded through internal accruals (ACL has cash of Rs70bn) – total outflow of Rs16.65bn to Sanghi promoters and Rs7.7bn for open offer (but low probability of tendering at this price). 

Assets have good potential to create value: 

Sanghi Cement has 6.6mtpa clinker capacity and 6.1mtpa cement capacity in Kachchh, Gujarat. More importantly, it has 1bn tonnes of high-grade limestone reserves and a captive jetty and bulk ships to transport cement to other western coastal parts of India (bulk cement terminal, each at Navlakhi Port in Gujarat and Dharamtar Port in Maharashtra). Also, captive thermal plants of 130MW and WHRS of 13MW, along with GMDC lignite mine within vicinity ensures lower power and fuel costs. Thus, Adani is confident of producing least cost clinker (Rs1,600-1,700/MT) from this plant. 

Targets 15mtpa capacity and Rs1,000/t Ebitda: 

In FY21, Sanghi reported an Ebitda/t of Rs1,100, but the falling volumes (WC constraints) and rising fuel prices led to Ebitda losses in FY23. Now, Adani targets to ramp up production, add new capacities (4mtpa through de-bottlenecking, at Rs5bn capex) and an exit run-rate of Rs1,000/t Ebitda by FY24-end. In phase 2, the company targets to add 3.3mmt clinker and 5mmt of cement capacity, taking total Sanghi capacity to 15mtpa by FY26 (capex of Rs30bn). There are no immediate plans to merge Sanghi Cement with ACL.