Ambuja Cements stock gains on Penna acquisition; Jefferies, Morgan Stanley bullish on volume growth

Adani group's Ambuja Cements to acquire 100% stake in Penna Cement Industries for Rs 10,422 crore.

Ambuja Cements has received a bullish call from Jefferies after it announced the acquisition of South-based Penna Cement for Rs 10,442 crore. Jefferies has a 'buy' rating on the Ambuja Cements stock, with a target price of Rs 735 per share. The brokerage said that the acquisition would strengthen the positioning of the Adani group cement company as a growing pan-India leader.

Shares of Ambuja Cements gained over 3 percent on June 14 as Morgan Stanley believes that the acquisition is incrementally positive for the industry. The international brokerage sees Ambuja increasing footprint in the south with this deal.

The acquisition should support volumes growth for Ambuja Cements over the medium term, said Morgan Stanley as it maintained an equal-weight rating on the stock with a target price of Rs 665 per share.

Amubja will acquire the stake from PCIL promoter group P Pratap Reddy and family. The acquisition will be fully funded through internal accruals, according to the statement.

The move comes as Adani targets capacity of 140 million tonne per annum (MTPA) by 2028, and aims to capture 20 percent market share by FY28 amid robust demand for the building material in the country.

Macquarie has maintained a neutral stance on Ambuja Cements with a target price of Rs 608. With this acquisition, the brokerage sees the cement maker's capacity share in the South Indian region expected to improve to 10-11 percent from the current 4-5 percent .

The deal value, ranging between US$90-100 per ton, is higher compared to the organic expansion costs for Ambuja Cements and its peers but aligns with recent acquisitions in the sector, it said.

According to analysts at Macquarie, a key factor to monitor is whether this acquisition will help Ambuja Cements reach its capacity target of 140 million tons by FY28. Additionally, it will be important to see if the company recalibrates its organic expansion plans following this acquisition.

Jefferies suggests that the increasing market share of major players like Ambuja Cements may further squeeze smaller, inefficient players. Additionally, this development might lead to more mergers and acquisitions in the sector.

Penna Cement has an operational capacity of 10 million tonnes (majority in the South) and clinker capacity of 7.3 million tonnes, with an additional 4 million tonnes under construction. CLSA calculates the valuation of the deal at $103 per tonne, compared to the replacement cost of $90-110 per tonne.

This acquisition will increase Ambuja Cements's total capacity to 91 million tonnes, moving towards its target of 140 million tonnes by FY28, it noted.

The international brokerage also noted that inorganic expansion has a lower adverse impact on the demand-supply balance in the industry. CLSA has issued a sell call on Ambuja Cements with a target price of Rs 575 per share.

Also Read | Ambuja Cements to acquire Penna Cement Industries for Rs 10,422 crore

Meanwhile, Citi has given Ambuja Cements stock a neutral call with a target price of Rs 675 per share. Based on 2021 data, Penna Cement's clinker reserves are at 630 million tonnes. the brokerage firm estimates the transaction's enterprise value per tonne at approximately $93, close to the greenfield replacement cost. They view the transaction positively, as it suggests Ambuja Cements is delivering on its growth plans.

While Penna Cement has been facing liquidity issues, a potential turnaround (similar to Sanghi acquisition) can enhance the value for Ambuja Cements, according to Nuvama Institutional Equities. At

the same time, utilisation ramp-up at PCIL (39 percent in FY23) shall bring in additional volumes to the market and intensify competition, it said.

"We like Ambuja Cements for its healthy capex plans and measures to lift cost efficiency," said Nuvama as it retained 'Buy' rating on the stock with a target price of 767 on FY26E EV/EBITDA of 18x.