Moneycontrol Pro Panorama | Ambuja-Sanghi deal, a step towards cementing consolidation 

Analysts cite synergies and scale as important elements that will support Ambuja and Sanghi share prices during the upcycle in cement.

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Ambuja Cements’ acquisition of Sanghi Industries undoubtedly highlights billionaire Gautam Adani’s thirst to accelerate capacity addition in the cement sector. More importantly, Adani’s swift moves in acquiring Ambuja Cements, ACC and now Sanghi Industries is driving consolidation in the cement sector.

Getting down to the deal, Ambuja’s capacity per year will increase from 67.5 million tonnes per annum (mtpa) to 76.3 mtpa, with plans to add 15 mtpa further to the Sanghipuram capacity over two years.

Of course, Adani has seen more benefits than mere capacity addition in the deal. Sanghi, which is currently loss-making (last quarter results of FY2023) carries 1 billion tonnes of limestone reserves that can be tapped by Ambuja. It has been among the lowest cost clinker facilities in the sector, whose operations can be synergised with other units.

An important aspect is its proximity to the port, which will make for lower logistics and transport costs while servicing the markets of coastal Kerala, Karnataka, Saurashtra, Gujarat and others. Plans have already been announced to invest in expanding the captive port at Sanghipuram to handle larger vessels. ACC and Ambuja units are anyway catering to other markets in the central and western hinterland.

In the cement sector, as in other manufacturing and capital-intensive sectors, timing strategic buyouts and acquisitions is key to successful integration. Analysts reckon that at an enterprise value of Rs 5,000 crore, the cost/tonne is $92, which is relatively lower than for giants such as UltraTech, Ambuja, ACC and Shree.

From an industry perspective, M&A in the cement sector, although not uncommon, was few and far between in recent times. Adani’s sense of urgency to be among the largest cement players, doubling capacity to 140 mtpa by 2028, has pressed the pedal on consolidation. Perhaps the southern cement market, which is reeling under overcapacity, would do well with some consolidation, too.

For investors in the cement sector, market consolidation is key to improving and sustaining cement price discipline. This will help improve profitability. One could give credit to the high demand for cement in the last few quarters and partly to the fall in input cost prices, but both revenue and profit ramp-up stands out in the performance of ACC and Ambuja in recent quarters.

Indeed, size does matter in capital intensive core sectors such as cement. Aditya Birla owned UltraTech Cement is the country's largest pan-India cement manufacturer with 140 mtpa capacity -- a goalpost that the Adani group wishes to reach. Analysts cite synergies and scale as important elements that will support Ambuja and Sanghi share prices during the upcycle in cement. In the near term, news of the open offer to be made at Rs 114.2 per share to acquire 26 per cent of the voting share capital has already fired up Sanghi's share price.

That said, unfavourable reports on the group’s leverage have made investors cautious. Furthermore, while the big groups in cement are keen to add capacity given the revival in demand in the last 12-18 months, the usual lull in activity prior to and for a few months after the elections could be a dampener to earnings growth.

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