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Penna Cement to strengthen market share in south

South market share to increase by 8pp to ~15%

* Ambuja Cements (ACEM) announced the acquisition of 100% stake in Penna Cement (PCIL) at an enterprise value (EV) of INR104.2b. This will increase ACEM consol. operational capacity to 89mtpa. The acquisition will be funded through internal accruals and is estimated to be completed within 3-4 months.

* PCIL has four integrated cement plants and two grinding units operational, with an aggregate clinker/cement capacity of 7.3mt/10.0mt. Additionally, it has 3.0mtpa/ 4.0mtpa clinker/cement capacity under construction, which will be completed within 9-12 months. PCIL has limestone reserves of ~638mt, including subsidiary (as per its DRHP filed in May’21). About 90% of PCIL’s capacity has railway siding and some plants are equipped with CPP and WHRS.

* The management clarifies that the capex cost of under-construction capacity is part of total EV of INR104.2b. Also, the management indicated that the acquisition will increase its presence in south India while further expanding its pan-India presence. This acquisition will improve the group’s market share in the south region by 8pp to 15%, while its pan-India market share will increase by 2pp.

* The stock trades at 19x/16x FY25E/FY26E EV/EBITDA. We maintain our Neutral rating with a TP of INR640, based on 16x FY26E EV/EBITDA. Highlights from the management commentary

* PCIL has resources available for setting up additional clinker and there are debottlenecking opportunities too. The company will have to incur minimal capex for replacing coolers, installing a conveyor belt, and increasing AFR and RE capacity. This will lead to cost savings of INR300/t. Moreover, ACC/Ambuja brands are placed as “A category brands” and command a premium of INR5- 10/bag, which will drive improvement in realization by INR200/t.

* PCIL can reach an EBITDA/t level of INR1,200-1,500 in the long term. Also, the management believes that the company will be able to serve all markets competitively at one of the lowest costs in the industry. It targets 15%+ RoCE at 85% capacity utilization.

* The company will be holding INR100b+ of cash reserves at FY25-end even after the ongoing expansions and the current acquisition.

Valuation and View

* ACEM is focusing on further cost reduction by increasing the share of green power and AFR, engaging in long-term procurement strategies for critical raw materials, and optimizing logistics. A successful execution of these plans could result in a positive surprise. ? ACEM has reiterated its capacity target of 140mtpa by FY28, for which work is in progress at different stages. The stock trades at 19x/16x FY25E/FY26E EV/EBITDA. We maintain our Neutral rating with a TP of INR640, based on 16x FY26E EV/EBITDA.

Highlights from the management commentary

* After this acquisition, the group’s operational cement capacity stands at 89mtpa. 4mtpa grinding capacity is under-construction and will be commissioned in the next 12 months. This acquisition will improve the group’s market share in the south region by 8pp to 15%, while its pan-India market share will increase by 2pp.

* Its integrated plant in Rajasthan (3mtpa clinker/2mtpa cement) will be commissioned in 12 months; 60% of civil structure has been completed at this plant. At Krishnapatnam expansion, ~50% of work is completed and it will be commissioned in nine months. PCIL also has 25,500 tons of self-discharging cement carrier and five bulk terminals. The acquisition will also enable ACEM to enter Sri Lanka markets. Further, MSA will be followed in PCIL too.

* PCIL has resources available for setting up additional clinker and there are debottlenecking opportunities too. The company will have to incur minimal capex for replacing coolers, installing a conveyor belt, and increasing AFR and RE capacity. This will lead to cost savings of INR300/t. Moreover, ACC/Ambuja brands are placed as “A category brands” and command a premium of INR5- 10/bag, which will drive improvement in realization by INR200/t. PCIL can reach to EBITDA/t of INR1,200-1,500 in the long term. Also, the management believes that the company will be able to serve all markets competitively at one of the lowest costs in the industry. It targets 15%+ RoCE at 85% capacity utilization.

* EV of this acquisition includes INR30b to be spent on completing the project and INR35b of debt. At Jodhpur plant, land is available with the company, and the balance land for railway siding and limestone will be acquired by PCIL. The management does not see any delay in this project. The company will be holding INR100b+ of cash reserves at FY25-end even after the ongoing expansions and the current acquisition.

* ACC is a dominant brand in the South, while ACEM is present in the region through bulk terminals. The group was losing market share in the region as there was a capacity constraint. Few large players are operating at ~78% capacity utilization in the south region; hence, the management believes that there is scope to improve the capacity utilization of PCIL. Inorganic acquisitions will result in consolidation in the region.

* The group has a target of reaching 140mtpa capacity by FY28, which will be achieved through a combination of organic and inorganic routes. The company will work on increasing capacities in different markets of the north and central regions. A blueprint is ready for 30mtpa further capacity addition, for which land has been acquired and mining leases are available.

* ACEM and ACC both have limestone mines in the south region. PCIL too has surplus land available. This augurs well for the company’s long-term growth in the southern region.

* The company targets to transport 10% of its total volumes through the sea route (on 140mtpa capacity). Sanghi’s target market would be till Mangalore and Cochin (through sea route). For other coastal areas of East and South, the Krishnapatnam plant will be preferred.

* Other highlights:

* Two of PCIL’s existing plants and Rajasthan plant will have fiscal incentives. ? Tuticorin GU capacity can be increased to 2.5mtpa from 1.5mtpa.

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