01-11-2024 12:13 PM | Source: Motilal Oswal Financial Services
Buy Ambuja Cements Ltd For Target Rs. 750 By Motilal Oswal Financial Services Ltd

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Announced acquisition of 46.8% stake in Orient Cement Consolidated capacity will increase to 97mtpa post-acquisition

* Ambuja Cement (ACEM) has announced the purchase of a 46.8% stake (37.9% from promoters and 8.9% from other public shareholders) of Orient Cement (ORCMNT) at a price of INR395.4 per share. The acquisition cost works out to be USD115/t (on the current operational capacity).

* ORCMNT has two integrated cement plants and one grinding unit operational, with an aggregate clinker/cement capacity of 5.6mt/8.5mt, spread in the South and Maharashtra markets. ORCMNT’s capacity utilization stood at 72%/64% in FY24/1QFY25 and EBITDA/t stood at INR732/INR708 in FY24/1QFY25. ORCMNT plants are equipped with railway siding, renewable power (13.5MW operational and 19.7MW under commissioning), WHRS (10MW), CPP (95MW), and AFR facilities. Further, ORCMNT is a debt-free company.

* The acquisition will be funded through internal accruals and is estimated to be completed within the next three to four months.

* We believe the acquisition is at an attractive valuation of USD115/t and higher than its previous acquisition of Penna Cement at USD90/t. The higher valuation is reasonable given ORCMNT’s higher capacity utilization, profitability, strong balance sheet, and availability of resources for future growth plans. ACEM currently trades at 17x/13x FY26E/FY27E EV/EBITDA. We reiterate our BUY rating with a TP of INR750, based on 20x Sep’26E EV/EBITDA.

Acquisition helps meet capacity target and drive cost efficiency

* The acquisition will increase ACEM’s consolidated operational capacity to 97.4mtpa and accelerate the achievement of its capacity target of 100mtpa/140mtpa. The management highlighted that it can expand ORCMNT’s clinker/grinding capacity by 10mtpa/14mtpa through a mix of brownfield and greenfield expansions in the South, North, and Central regions.

* The company has the opportunity to further improve the operational efficiency of ORCMNT by increasing the green power share, optimizing fuel costs through domestic coal linkage, and optimizing logistic costs with an improved geo-mix. For instance, the clinker rail freight for Jalgaon GU will be reduced by INR150/t by swapping with its existing footprints.

* It targets to ramp up capacity utilization to 85% over the next three years (vs. 72% in FY24). Further, it aims to leverage the ACEM and ACC brands to increase trade mix, premium cement share, and realization. With these initiatives, it expects to reach a sustainable EBITDA/t of INR1,500 by FY28 and target +15% ROCE on the investment.

Valuation and view

* ACEM is continuously focusing on cost reduction by increasing the green power share, optimizing logistics via lead distance reduction, and optimizing the warehouse and rail-road mix. We believe the company’s value-accretive acquisitions and ambitious organic expansion plans will drive growth and profitability in the long run.

* The stock currently trades at 17x/13x FY26E/FY27E EV/EBITDA. We value ACEM at 20x Sep’26E EV/EBITDA to arrive at our TP of INR750. Reiterate BUY.

 

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