Many gains from ACC-Ambuja merger
The stocks of cement manufacturers ACC and Ambuja Cements would likely generate high investor interest in today’s trading, given the long-term operational benefits from a proposed merger of the two, and the steep gap in valuations between those of the foreign-owned companies and their large-sized domestic peers.
It makes logical sense to operationally merge ACC into Ambuja Cements, given the structural benefits of the equity holding: Ambuja is already the holding company of ACC. Post-merger, the combined entity would likely save about 10% in operating expenses. This is reflected in logistics costs (reduction of lead distance from the plant to relevant markets served), manpower, and taxes. Second, the blended realisations of the merged entity are likely to improve. This will be achieved by aggressively pushing the stronger brand in a given region.
“One of the major benefits of the merger is the improvement in realisations. The merged entity would follow a strategy of pushing aggressively the ACC brand in regions where it is strong, and pushing Ambuja brand where it is strong. This should enhance the blended realisations,” said Nitin Bhasin, cement analyst at Ambit Capital.
Analysts also point out that the merged entity’s EBITDA per tonne is expected to increase by about Rs 60-70, enhancing the earnings. ACC generates EBIDTA per tonne of Rs 600, while Ambuja generates EBIDTA per tonne of Rs 800.
Analysts said that after taking into account the shareholding structure among Lafarge, Ambuja and ACC, the merger swap ratio is expected to be such that for every one share of ACC, shareholders would get 6.7 shares of Ambuja Cements. They said that equity dilution in Ambuja Cements is expected to be either 64% if one takes into account treasury shares or 32% if one cancels treasury shares.
Another major factor working in favour of the merger is the steep discount in the valuations of ACC and Ambuja Cements, compared with those of their large-sized peers. In the past five years, ACC and Ambuja Cements have expanded at a rate much slower than UltraTech Cement, Shree Cement, or Dalmia Bharat, and the growth in the share price of the foreign-owned companies has accordingly trailed that of its rivals.
In the past five years, the share price of ACC and Ambuja Cements rose in the range of 40-70%, while the prices of UltraTech Cement and Shree Cement have risen more than three times in the same period. Due to this, the stocks of ACC and Ambuja Cement are trading at an EV per tonne of $130-160, based on FY-18 earnings: By contrast, the stocks of UltraTech and Shree Cement are trading at an EV per tonne of $270-280.
In the coming quarters, this discount is expected to come down after the merger, and the combined entity would receive higher valuation from the Street. In its latest commentary, LafargeHolcim, the parent of ACC and Ambuja, said that it clocked 13% volume growth globally and is confident of an improvement in cement demand in the second quarter of the current fiscal.