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Ambuja Cements (ACEM IN) has announced the acquisition of Penna Cement (PCIL). According to the agreement, ACEM will acquire a 100% stake in PCIL for an enterprise value of INR 104.22bn. 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. The last major acquisition in South India was when in November 2023, UltraTech Cement purchased the cement business of Kesoram Industries (valued at an EV/tonne of ~USD 91 or ~INR 7,590).
ACEM: Acquisition to strengthen market share by ~8% in South India
Currently, PCIL operates four integrated plants, two each in Andhra Pradesh and Telangana and one split grinding unit each in Andhra Pradesh and Maharashtra. PCIL's cement and clinker capacity are at 10mn tonnes and 7.3mn tonnes, respectively. Upon completion of this acquisition, ACEM's consolidated cement capacity, excluding its ongoing expansion projects, will reach ~86mn tonnes. As per management, this acquisition will increase ACEM's consolidated market share by ~2% at the pan-India level and by ~8% in South India.
PCIL: Ongoing capex to bolster capacity
PCIL is currently adding greenfield capacity (3mn tonnes clinker and 2mn tonnes cement capacity) at Jodhpur in Rajasthan. Also, it is adding brownfield capacity - 2mn tonnes at Krishnapatnam in Andhra Pradesh. These projects are expected to be completed in the next 6-12 months. Post completion, ACEM may gain access to an additional 3mn tonnes of clinker and 4mn tonnes of cement capacity, taking its clinker/cement capacity to 10.3mn tonnes/14mn tonnes. Given the surplus clinker capacity in North India, ACEM can expand its grinding capacity further by 2.5mn tonnes.
PCIL well equipped with ancillary resources
PCIL has coal-based captive power capacity (CPP) of 77MW and waste heat recovery system (WHRS) capacity of 32MW. Also, this acquisition will help ACEM strengthen its sea transportation logistics, with five bulk cement terminals in Kolkata (West Bengal), Gopalpur (Odisha), Karaikal (Puducherry), Kochi (Kerala) and Colombo (Sri Lanka). Simultaneously, ~90% of PCIL's cement capacity comes with railway sidings, which will help ACEM manage logistics cost effectively.
Valuation: Reiterate Accumulate with a TP of INR 655
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 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, the asset may earn return ratios similar to cash yield and thus, may be EPS-neutral. We reiterate Accumulate on ACEM with a TP of INR 655, based on 18x March 2026E EV/EBITDA.
Shares of Ambuja Cements Limited was last trading in BSE at Rs. 664.30 as compared to the previous close of Rs. 668.50. The total number of shares traded during the day was 296656 in over 9329 trades.
The stock hit an intraday high of Rs. 680.20 and intraday low of 654.75. The net turnover during the day was Rs. 197830915.00. |
