Adani Stock Below Rs 700 To ACCUMULATE: How Ambuja To Rival Ultratech With Rs 10,442 Crore Acquisition

Ambuja Cement is buzzing this week after it announced one of the largest acquisitions in the cement industry. Ambuja which is backed by Adani Group has signed a binding agreement to acquire 100% of Penna Cement Industries Ltd (PCIL) at an enterprise value of Rs. 10,422 crore. The acquisition is likely to give the much-needed exposure to Ambuja in the southern market which is dominated by Ultratech Cement.

At the time of writing, Ambuja Cements traded at Rs 666.55 apiece, down by 1.06% on BSE with a market cap of Rs 1,63,920.87 crore. The stock is still near its 52-week high of Rs 690 apiece.

Ambuja's weekly upside is over 5%, while the stock zoomed by 9% on a month-on-month basis. YTD, the stock rallied by 26%, while in a year, the stock zoomed by 49%.

Ambuja is acquiring 100% shares of PCIL from its existing promoter group, P. Pratap Reddy and family. The acquisition will be fully funded through internal accruals.

As per the statement, PCIL has 14 MTPA cement capacity, of which 10 MTPA is operational, and the remaining is under construction at Krishnapatnam (2 MTPA) and Jodhpur (2 MTPA) and will be completed within 6 to 12 months. Around 90% of the cement capacity comes with railway sidings, and some are supported by captive power plants and waste heat recovery systems. Further, surplus clinker at the Jodhpur plant will support an additional 3 MTPA cement grinding capacity over and above 14 MTPA.

The existing dealers of PCIL will move to Adani Cement's market network to bring in formidable synergy.

Ambuja Cement is one of India's leading cement companies and a member of the diversified Adani Group - the largest and fastest-growing portfolio of diversified sustainable businesses. Ambuja has taken the Adani Group's cement capacity to 78.9 MTPA, with 18 integrated cement manufacturing plants and 19 cement grinding units across the country.

However, Ambuja falls behind Ultratech when it comes to market leadership in the cement industry in India.

Currently, Ultratech is the most valued cement company with a valuation of over Rs 3.17 lakh crore, followed by Ambuja Cement which has a market value of over Rs 1.64 lakh crore. Adani also has ownership of ACC whose majority stake is held by Ambuja. With ACC's market cap of Rs 49,388.05 crore and Ambuja Cement's valuation, Adani Group is the second largest cement player in India with a total capitalisation of over Rs 2.13 lakh crore.

The deal with Penna will enable Ambuja to penetrate new Southern markets, which as per Prabhudas Lilladher would be mainly AP and Telangana where ACEM has no material presence and both states are expected to benefit from the recent regime change.

Not just that Penna would also complement Ambuja's portfolio with five port-based bulk terminals in South & East India which would aid ACEM in supply undersupplied markets immediately.

Meanwhile, Motilal Oswal believes that the acquisition will improve the group's market share in the south region by 8pp to 15%, while its pan-India market share will increase by 2pp.

In Motilal's view, ACEM is focusing on further cost reduction by increasing the share of green power and AFR, engaging in long-term procurement strategies for critical raw materials, and optimizing logistics. A successful execution of these plans could result in a positive surprise.

Notably, Ambuja's acquisition of Penna is also the largest in the southern market since November 2023 when UltraTech Cement purchased the cement business of Kesoram Industries. Both behemoths are aiming to strengthen their position in the southern cement market of India.

According to Elara Capital, the deal is expected to be completed in the next 3-4 months and will be funded via internal accruals. Adjusting for surplus clinker, the 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.

On the valuation of Ambuja Cements, Prabhudas said, "With a strong balance sheet and remarkable execution speed, we believe ACEM's consolidated performance would improve substantially going forward. We expect ACEM to deliver incremental 5-6mt volumes from PCIL assets in FY26 once the deal gets consummated over the next few months."

Prabhudas note added, " We have not yet incorporated PCIL into ACEM estimates however with Proforma P&L, ACEM FY26E EBITDA gets upgraded by 11% with ~6mt volumes and TP can see an additional ~Rs40 hike. We have tweaked our estimates post incorporating the FY24 annual report and maintain Accumulate with a revised TP of Rs 697 (Rs 683 earlier) on the stock. Stock trades at EV of 17.2x and 13.6x FY25E/26E EBITDA."

Meanwhile, Elara's note said, "We believe this acquisition will help ACEM move closer to its long-term growth target of 140mn tonne capacity by CY28. Additionally, capacity augmentation would strengthen ACEM's position in India, likely making it a key beneficiary of demand prospects. However, due to the teething issues at PCIL's plants and the regional mix, which would tilt towards the surplus market of South India, the acquisition may be margin-dilutive in the medium term."

Given the competitive intensity in South India in the medium term, Elara's note added, "The asset may earn return ratios similar to cash yield and thus, may be EPS-neutral."

On the other hand, Emkay Global has maintained BUY on Ambuja stock for a target price of Rs 720 ahead of its Q4 results.