Adani-Holcim deal to not hurt pricing much

Jefferies India analysts reckon that the deal value implies an enterprise value per tonne of $164 and $152 for CY22 and CY23 estimates, respectively. “Given the premium valuation Adani group is paying for the acquisition, the required Ebitda per tonne is about Rs2,000 to achieve double-digit return on equity (assuming 1:1 debt to equity, 7% interest rate and 80% capacity utilisation),” said Jefferies’ analysts in a report on 16 May. Ebitda is earnings before interest, tax, depreciation and amortization.

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Investors will now have to watch how the competitive intensity shapes up and what the impact will be on pricing. In the last decade, both Ambuja and ACC have lagged peers in terms of capacity addition, thus losing market share in volumes. The 10-year volume compound annual growth rates for Ambuja and ACC are 3% and 2%, respectively, compared to UltraTech Cement’s 9%, according to Kotak Institutional Equities. Ambuja and ACC’s combined capacity at March-end was about 67.5 million tonne.

As such, the deal could bring a turnaround. “Adani is unlikely to give the incumbents any opportunity to take further market share from Ambuja-ACC but we do not see any risk to market pricing discipline,” said Kotak’s analysts in a report on 16 May.

Further, both the companies will benefit from synergies because of the presence of Adani companies across sectors, which would enable margin expansion. Also, “there could be 5-7% increase in per tonne Ebitda margins for the two companies if Adani were to discontinue the technical know-how fees that Ambuja and ACC used to pay to Holcim (at 1% of sales),” pointed out a report by Nomura on 16 May.

Announcements on growth plans, funding, and a potential merger of Ambuja and ACC would be key factors to watch out for. The transaction is expected to close in the second half of CY22, making Adani the second largest cement producer in India in terms of capacity.