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Fairly valued on upgraded organic growth outlook

Adani group’s acquisition of Holcim’s stake in ACC/Ambuja has boosted growth expectations, and led to ~25%/65% re-rating in EV/EBITDA valuations of ACC/Ambuja vs. their last 5 years’ average. Additionally, on Friday (16th Sep), Ambuja Board has approved fund raising of Rs200bn through preferential allotment of warrants (conversion price: Rs419/sh) to promoter group companies, increase the credibility of 140mt cement capacity target in 5-years, as articulated by Adani Group Chairman recently. We upgrade our capacity forecast for Ambuja + ACC to 120mt by CY27 (~12% CAGR over CY22-27E) from ~95mt previously. We assume entire incremental capacity would come through organic-route, in our base-case. Further, we bake-in cost synergies (with promoter group) of Rs100/ton and discontinuation of royalty payments (~Rs50/ton). Our Sep’23 TPs for ACC/Ambuja are up by 33%/ 47% to Rs2,970/ 530 respectively, driven by 10-15%/12% upgrade for ACC/Ambuja in CY23E-24E EBITDA, and an increase in implied fair value EV/EBITDA multiples by 20%/ 45%. We retain our Hold ratings given moderate upside on revised base-case; the stocks have run up 25%/45% since the deal announcement.

Our bull case scenario suggests potential 47%/51% upside in TP for ACC/Ambuja:

The Adani Group targets becoming the largest and most-efficient manufacturer of cement by 2030. We have strived to analyze various scenarios, in the event of Adani turning aggressive on capacity additions: 1) In our base case, we factor-in ACC+Ambuja cement-capacity of 120mt by CY27E (Ambuja: 70mt; ACC: 50mt) through the organic route. Further, we have yet to factor-in equity infusion of Rs200bn; 2) For the upside case, we factor-in ACC+Ambuja capacity of 140mt by CY27E – incremental 20mt from the base case via the inorganic route; Rs100/ton additional cost benefits led by group synergies and merger; we also build-in equity dilution on conversion of warrants. This provides 9%/17% upside for ACC/Ambuja to our base case TP; 3) In our Bull case, we factor-in ACC+Ambuja capacity of 140mt by CY27E – upto 100mt through organic and 40mt through inorganic route; Rs100/ton additional cost benefits led by group synergies and merger

50bps increase in realization CAGR over CY22E-27E+50bps increase in long-term terminal growth rate+250bps increase in LT RoIC; also, equity dilution on conversion of warrants. This provides potential 47%/51% upside in TP for ACC/Ambuja; 4) For the downside case, we factor-in ACC+Ambuja capacity of 140mt by CY27E – incremental 20mt from the base case organically; 250bps decline in LT RoIC+50bps decline realization CAGR over CY22E-27E; and equity dilution. This provides 18%/7% downside for ACC/Ambuja to our base case TP.

Fund-raise of Rs200bn aimed at achieving target of doubling capacity: Post a successful conversion of warrants within 18 months, the promoter stake in Ambuja will increase, from 63.2% to 70.3%. We have yet to factor-in the same in our base-case assumptions. As per the current growth assumptions in our models, we raise combined-entity capacity forecasts by ~25% to ~120mt (previously 95mt) by CY27E.

We raise our EBITDA estimates by 10-15%/12% for ACC/Ambuja over CY23-24, factoring-in group synergy benefit in 2-3 years and elimination of royalty paid to Holcim. However, our revised EBITDA/ton forecast for Ambuja (Rs1,300/ton in CY24E) and ACC (Rs1,150/ton in CY24E) is ~5% and 15% lower, respectively, than UltraTech’s.

Ambuja/ACC vs UltraTech: ACC/Ambuja stocks have been trading at a 30%/20% discount to UltraTech since the last 5 years, for want of growth-focus. Ambuja stock has sharply re-rated and is currently trading at 35-40% premium to UltraTech, given increase in growth outlook under new promoter, in our view

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