Holcim stake sale | Few potential buyers in India: JP Morgan

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Holcim Ltd., the world’s biggest cement maker, is considering a potential sale of businesses in India including Ambuja Cements, according to a Bloomberg report. Holcim controls 63.1 percent of Ambuja while 4.48 percent stake in ACC. Ambuja Cement owns a 50.05 percent stake in ACC. Hence Holcim directly controls Ambuja and indirectly controls ACC.

According to an ET report, Holcim is in talks with JSW Group, Adani Group and Shree Cement (UW) to potentially sell its stake in Ambuja Cement.

"In our view, any new deep-pocketed player’s entry via a potential buy-out of Holcim’s stake in Ambuja Cement (and indirectly ACC) would be negative for the Indian cement industry as capacity expansion could accelerate (historically ACC and Ambuja have been slow in cap add). We prefer ACC over Ambuja," said JP Morgan in its recent report.

After years of underinvestment in India, both ACC and Ambuja Cement recently turned aggressive on expansion plans with both firms announcing plans to take total capacity to 50MT each. ACC’s current capacity stands at 34MT and it is currently working on multiple projects. Ambuja’s current capacity stands at 31.5MT and recently 7MT of expansion was announced.

According to the JP Morgan report, the combined capacity stands at 66MT and ongoing projects would take capacity to 78MT while combined EBITDA on current year 2021 basis stood at Rs 6,200 crore and profit after tax Rs 4,050 crore.

JP Morgan says that the complete buy-out in Ambuja Cement of Holcim’s stake (63.1 percent) would cost the buyer Rs 46,200 crore with a mandatory open offer (26 percent) in both ACC and Ambuja would cost another Rs 29,800 crore, taking total cost to Rs 78,000 crore. . Post successful open offer, the new buyer’s stake would stand at 89 percent in Ambuja and 81 percent in ACC and it would have to be seen if the buyer comes down to 75 percent or de-lists the companies.

"Given the size of the potential transaction, we see very few Indian business houses who could be potential buyers, hence it is difficult to see large premium from current stock price," JP Morgan report said. The brokerage firm has maintained neutral rating and increased its target price to Rs 380 a share from Rs 320 a share.

"Current implied valuation for Ambuja is already at 14x CY 22E EV/EBITDA at $164/t on CY 22E attributable capacity and $140/t on CY23E attributable capacity (without any holding company discount for ACC stake) and the underlying EBITDA/T forecast implies cyclical high EBITDA of last year to be broadly maintained, even as we highlight massive cost pressure for the industry currently. Also, given the sheer size of the transaction (~$10bn), we believe that if Holcim is really keen to exit India, then finding buyers for such a large transaction would be difficult," the report added.