Consolidation in the cement industry continues, with Adani-owned Ambuja Cements announcing a 100 per cent acquisition of Hyderabad-based Penna Cements Industries Limited (PCIL) for an Enterprise value of ₹10,422 crore. With an operational and to be commercialised capacity of 14 million tonnes per annum (mtpa), the PCIL deal is valued at $89 per tonne, which is marginally below the replacement cost of $90-100 per tonne for similar capacities. Ambuja can increase its Southern market share with the deal, which can be value-accretive if the expansion pans out.
Ambuja capacity targetsAmbuja aims for a consolidated capacity of 140 mtpa by FY28, from the current 77 mtpa. The current deal can add 10 MTPA which is operational and another 4 mtpa is under construction expected to be commercialised in next one year. This will take Adani Cement operational capacity to 89 mtpa, including the 2 mtpa acquisition in April 2024. Ambuja has lowest presence in South India, with North and Eastern regions accounting for 27 per cent of FY24 sales and Western, Central and Southern regions accounting for 24, 14 and 9 per cent.
In terms of market, its pan-India market share improves by 2 per cent with the deal. South India market share will reach 15 per cent versus 8 per cent earlier. Over and above the 14 mtpa capacity, PCIL also has a 3 mtpa cement grinding capacity in North India, which can be leveraged for further capacity expansion.
Along with cement facilities, PCIL acquisition can also add sea transportation logistics with five bulk cement terminals at Kolkata, Gopalpur, Karaikal, Kochi and Colombo, to serve peninsular India and exports to Sri Lanka for the group.
PCIL operations, on the other hand, are facing a strong decline and can benefit from a strategic overhaul that Ambuja group can provide. The revenues have declined at 37 per cent CAGR in last two years to ₹1,241 crore in FY24 compared to Ambuja’s revenue gowing at 2.5 per cent CAGR in the period. This could explain the deal at value lower than the replacement cost.
Valuation comparisonBased on the acquisition EV of ₹10,422 crore and assuming capacity at 14 mtpa since the cost is included in the EV, PCIL is being acquired at $89 per tonne. Optimistically, if the 3mtpa expansion fructifies, the deal can be priced at even lower rate. This falls between the valuation paid in the latest two acquisitions in the space. Ambuja Cements acquired Sanghi Cements in August 2023 at $99 per tonne for its 6.1 mtpa. But Dalmia Bharat acquired Jaiprakash’s 9.4 MTPA cement facility in December 2022 at $73 per tonne. The latter was a stressed asset, which could explain the large gap.
If the planned 3 mtpa capacity comes online as anticipated and additional 3 mtpa capacity is leveraged with minimal investment, the PCIL investment can be value-accretive for Ambuja in the long run. The group has successfully executed such value addition earlier as well. Adani acquisition of Ambuja was executed at $157 per tonne and is now valued at $221 per tonne.
On a PE basis, Ambuja Cements trades at 36 times one-year forward earnings, in line with industry leader UltraTech Cements.
