In May 2022, the Adani Group won a deal to acquire Swiss major Holcim’s India operations, giving it a controlling stake in ACC and Ambuja Cement, deal includes Adani Group Holcim holds a 63.06 per cent stake in Ambuja (which also holds a 50.05 per cent stake in ACC) as well as a direct 4.48 per cent stake in ACC, making it the parent company of two of India’s major cement companies.
As per SEBI guidelines, the acquirer is required to make a mandatory offer to the existing shareholders to the extent of 26 per cent of the outstanding shares. The offer price has been declared at ₹385 per share for Ambuja Cements and ₹2,300 per share for ACC. This represents a premium of 0.65 percent and a discount of 3 percent, respectively, on the closing price on August 25. Adani has now got the necessary statutory approvals and the open offer for ACC and Ambuja will start from August 26, 2022 and close on September 9. , 2022.
Should you tender?
While the Adani Group has held on to its expectations for the long-term outlook for the cement sector in India, investors need to note that profitability is currently under pressure due to a steep rise in fuel and other input costs. In the past six months, that is, since the start of the Russo-Ukraine war, the rise in energy prices has had far-reaching effects. This increase in prices has taken a toll on margins and profits and all players in the industry have been affected by it.
Historically, electricity and fuel prices used to be 20-25 per cent of sales, but in Q1 FY23, electricity and fuel costs have increased to 25-35 per cent of sales. However, over the past six months, ACC and Ambuja shares have given positive returns and outperformed their peers. Expectations of Adani deal and open offer have fueled both the stocks.
ACC is currently trading at a one-year P/E of 24.1x (versus 21.4x the five-year average) and EV/EBITDA of 13.3x (versus 10.9). Ambuja Cements is trading at one-year forward PE of 27.1x (vs 22.2x) and EV/EBITDA at 13.1x (vs 9.5). At a time when profitability is under pressure, both are trading at a good premium to historical valuations on several metrics. Any possible impact on the growth prospects due to the global slowdown and the effects of its spread on India also need to be taken into account.
As mentioned above, with both ACC and Ambuja now trading at or near the open offer price, there is no scope for any arbitrage opportunity in the shares tender. Given the current macro environment, there isn’t much steam left, the opportunity from the open offer is also fully factored in. Therefore, it appears prudent for investors to book profits in both the stocks, given the costly valuations the industry is currently facing.
26 August 2022