IGI Logo

Is Holcim planning to exit Indian operations?

News articles indicate that Holcim is evaluating stake sale option in ACEM

News articles indicate that Holderind Investments Ltd. (Holcim) is planning to exit Indian operations (Link) and is evaluating a stake sale option in ACEM. Holcim holds 63.19% in ACEM and 4.48% in ACC, which is a subsidiary of ACEM as the latter holds 50.05% stake in ACC. Holcim has a global cement capacity of 293mtpa as of CY21 with India representing ~24% of its total capacities.

ACEM has a grinding capacity of 31.4mtpa and plans to expand the capacity to 39.9mtpa by CY24E (it recently announced capacity expansion plans in the East region). About 42% of its grinding capacities are in the North, followed by 28%/26%/5% in the West/East/Central regions, respectively.

ACC has a grinding capacity of 34.9mtpa, which will be expanded to 39.7mtpa by 1HCY23E. Post-completion of the ongoing expansion, ACC will have 23-27% grinding capacities in the East, South and Central regions; whereas; 15%/10% of its capacities will be in the North/West regions, respectively

Holcim (ACC and ACEM combined and considering expanded capacities of ACC) has 28% of grinding capacities in the North followed by 26% in the East, 18% in the West, 15% in Central and 14% in the South regions.

ACEM is trading at USD220 CY23E EV/t (assuming 20% HoldCo discount for its stake in ACC); whereas; ACC trades at CY23E EV/t of USD122.

JSW, Adani and Shree Cement likely to be approached for the deal

News articles indicate (Link) that Holcim has possibly held early-stage negotiations with JSW and Adani group to gauge their interests for this acquisition apart from approaching a few regional players such as Shree Cement.

JSW Cement has a grinding capacity of ~15mtpa spread across South, East and West regions. About 59% of its capacities are in the South followed by 26%/15% in the East/West regions, respectively. JSW primarily depends on imported clinkers and at present, has a clinker capacity of 3.2mtpa only (including 1mtpa in Fujairah). Shiva Cement, a subsidiary of JSW Cement, is expanding its clinker/ cement capacities by 1.36mtpa/1mtpa, respectively. In 2021, JSW Cement entered into RMC business by setting up its first unit in Mumbai. It raised INR15b from global PE investors in Jul’21 for its next phase of growth plans.

Adani group has been planning to enter into the cement business and formed a separate subsidiary, Adani Cement Industries Ltd, in Jun’21. We believe that the company may plan to set up an integrated plant in Kutch, Gujarat and grinding units in Dahej, Gujarat and Raigad, Maharashtra. The group has also won limestone blocks in Andhra Pradesh, Rajasthan and Gujarat through bidding process.

Shree Cement has a grinding capacity of 46.4mtpa with 53%/30% of its capacities in the North/East regions, respectively. West, Central and South comprise 6%, 4% and 6% of the grinding capacities, respectively. Though, Shree Cement has been consistent in capacity additions, it refrains from leveraging the balance sheet. To date, it has done only one acquisition in the domestic market, which was of a grinding unit of JP Associates in Panipat, Haryana with an installed capacity of 1.5mtpa. In our view, the company will face regulatory hurdles (approvals from Competition Commission of India) in the North and East regions, even if it shows its interest for this deal.

Complete exit of Holcim will require a huge investment

We believe that Holcim will prefer a cash deal and not a share swap if it has plans to exit Indian operations. This acquisition will require a huge investment by the acquirer and this will make the complete exit a tall task.

According to our calculations, the complete exit of Holcim will need an investment of USD10.2b (including an open offer of USD3.9b) at current market capitalizations (Mcap) of ACEM and ACC. For our calculations, we have assumed that Holcim will sale its stake in ACEM/ACC and the acquirer will have to give an open offer in both the companies. At current Mcaps of ACC and ACEM, the deal would have an EV/t of USD185.

The huge investments may also lead to leveraging of the balance sheet of the acquirer that generally is not favored for a cyclical business. Holcim’s balance sheet does not seem to be leveraged and hence, it should not be in a hurry to exit Indian operations (Net D/E of 0.33x and net debt/EBITDA of 1.5x in CY21).

Sector may benefit in the near term; prefer ACC over ACEM

We are not changing our sector views based on recent news flows and would wait for official announcements from the companies. This deal, if goes through, should be positive for the sector in the near- to-medium term as the acquirer might not chase growth capex immediately. Acquisition by the Adani group (if it happens) may also alleviate concerns of an entry of a new aggressive player in the sector as the group’s immediate focus will be on streamlining the operations in the near term. In the long run, however, sector dynamics would depend on the growth plans and aggressiveness of the acquirer.

Holcim has changed its India strategy over the last few years and its focus has shifted on growth capex as well as efficiency improvements (efficiency projects named as “Project Parvat” by ACC and “I Can” by ACEM) for both the companies. ACC has undertaken expansion plans in the Central markets (along with grinding capacity expansion in the East region); whereas, ACEM has recently announced its expansion plans in the East (its expansion in the North region got completed in CY21). Holcim obtains 1% of the turnover of ACC and ACEM (equal to 4-5% of CY21 EBITDA) as technology & knowhow fees.

We maintain our BUY rating on ACC with a TP of INR2,485 (based on 12x CY23E EV/EBITDA) and retain our Hold rating on ACEM with a TP of INR350 (premised on 12.5x CY23E EV/EBITDA and 20% HoldCo discount for its stake in ACC). We continue to prefer ACC over ACEM.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer