Ambuja Cements - Penna Deal Is Value Accretive: Nirmal Bang

Nirmal Bang Report

Ambuja Cements Ltd. has entered into a binding agreement to acquire a 100% stake in Penna Cement Industries Ltd. for an enterprise value of Rs 104.2 billion.

The acquisition will take the total production capacity of Adani’s cement business to 89 million tonnes per annum as of June-24.

Huge cost savings to improve Ebitda/tonne by Rs 300-400/tonne: Adani group would require an additional capex of Rs 1–2.5 billion to run the plant at full capacity.

The railway sidings (90% of the plants are supported by railway sidings) will reduce the logistics costs by one-third. The captive power plants and waste heat recovery systems will bring in additional savings of 15-20%. Currently, the plant is running at negative Ebitda.

1 billion tonne of high-quality reserves: Penna Cement's sufficient limestone reserves of 1,022 million tonne will allow the Adani group to increase cement capacity through debottlenecking and additional investment.

According to our research, the acquisition cost based on enterprise value/tonne is $73/tonne for 17 mtpa, which includes 10 mtpa of operational and 7 mtpa nonoperational capacities at Krishnapatnam (2 mtpa) and Jodhpur (2 mtpa).

Besides the surplus clinker at the Jodhpur plant, which will support an additional 3 mtpa cement grinding capacity. This valuation does not factor the limestoe reserves acquired. The deal is ~25% cheaper when relatively compared to greenfield project cost @$100/tonne as per our estimates. 

We maintain a Buy rating on Ambuja Cements, valuing the stock at 12 times March-26E EV/Ebitda with a target price of Rs 1,010.

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