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Synopsis :The midcap and small-cap cement sector is experiencing significant gains following Ambuja Cements' Rs10,422-crore acquisition of Penna Cements, aimed at consolidating its market position. This strategic move by Ambuja Cements, part of the Adani Group, is set to improve its market share and strengthen its capacity, positioning it closer to industry leader UltraTech Cement. Analysts are optimistic about Ambuja's growth prospects, citing favorable acquisition costs and potential for superior volume growth and margins.
As of now, 26 out of the 33 listed cement companies on Dalal Street have shown gains ranging from 1% to 7%. Notable performers in this surge include midcap and small-cap firms such as Shiva Cement, Sanghi Industries, Nuvoco Vistas, Deccan Cements, Sagar Cements, and India Cements. The consolidation within the midcap cement sector is driven by smaller players struggling with scaling capacities and pricing pressures from larger competitors.
Mayuresh Joshi, head of research at William O'Neil Securities, anticipates further consolidation in the midcap cement sector. He notes that companies like Orient Cement, India Cements, and Sagar Cements are potential acquisition targets due to their inability to scale up independently.
Ambuja Cements, part of the diversified Adani Group, has earmarked a $3 billion war chest to facilitate further acquisitions. Currently, Ambuja and its sister company ACC Ltd have a combined installed cement capacity of 79 million tons, still trailing behind UltraTech Cement's 152.7 million tons. However, with an ambitious target to reach 140 million tons per annum (MTPA) by 2028, Ambuja’s recent acquisition of Penna Cements, which adds 14 MTPA capacity in Andhra Pradesh, Telangana, and Rajasthan, is a strategic step towards this goal.
The acquisition of Penna Cements is projected to improve Ambuja's market share by approximately 2% across India and by 8% in South India. Analysts are optimistic about Ambuja's growth prospects, especially given the favorable acquisition cost metrics. Elara Capital highlighted that the Penna deal was valued at an EV/tonne of about $79 (approximately Rs6,595), aligning with brownfield capital expenditure costs but lower than recent mergers and acquisitions in the region.
In light of these developments, Centrum Broking has upgraded Ambuja Cements from "Sell" to "Buy," raising its target price to Rs775 from Rs560. Analysts Mangesh Bhadang and Sanjit Tambe from Centrum believe that Ambuja is poised for superior volume growth and improved margins over the next four to five years, despite potential risks related to capital expenditures and commodity price shocks.
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