Adani Group’s takeover of Holcim’s stakes in Ambuja Cement and ACC is touted as the biggest open offer in the history of corporate India.

At the open offer price of Rs 385 per share, using a key industry valuation metric of enterprise value (EV) per tonne, standalone Ambuja Cements NSE has been valued at nearly $299 per tonne. In contrast, ACC at an open offer price of Rs 2,300 per share is valued at about $131.4 per tonne. This reflects the inherent differences in the operational efficiency and thereby performance of the respective companies.

Other leading players in the cement industry, like Ultratech, which has the largest capacity in the sector with nearly 120 million tonnes, is currently valued at the stock markets at nearly $199 per tonne. Shree Cement with a capacity of nearly 47.4 million tonnes is valued at about $223 per tonne. Enterprise value is a measure of the company’s total value, and it is calculated by adding market capitalisation of a company plus its debt and minus the cash in the books.

The standalone Ambuja Cements has one of the highest operating margins in the industry, and in FY 2022, Ambuja Cements standalone operating profit margins were nearly 23 per cent, a decline of 4.6% YoY, on sales of Rs 14,268 crore. Meanwhile, ACC’s standalone operating profit margins were at 18.4 per cent, a fall of nearly 0.9% YoY in the 12 months ended FY 2022. In the case of Ultratech, standalone operating margins were at 22.7 per cent during FY 22, a fall of nearly 4%. Shree Cement recorded a 22.2 percent margin as against 30 percent in the previous year due to surge in power and fuel costs.

It is interesting to compare today’s scenario with the one 10 years ago in September 2012 when ACC was valued at $132 per tonne, similarly, enterprise value per tonne of Grasim and UltraTech was $121 per tonne and $176 per tonne, respectively. In case of Ambuja Cements, the company’s valuation was at $171 per tonne. The 212-million-tonne cement industry then saw major deals at a valuation of as high as $235 a tonne paid by Irish firm CRH for My Home Industries in 2008. Portuguese player Cimpor paid $162 for Shree Digvijay Cement Company in 2007 while Holcim paid $200 for Ambuja Cements.

However, the deal in June 2008 when French firm Vicat paid $100 a tonne for Sagar Cements, was the lowest in the previous years of M&A activities. The story has not changed as event then as now, coal prices rocked the destinies of cement companies. The decline in coal prices from as high as $160 a tonne to as low as $70 a tonne changed fortunes even then.

Coming back to the current scenario, the key problem continues to be the rising prices of pet coke and coal doubling during the year. Cement firms reported single digit sales growth for the second consecutive quarter in January-March driven by gradual demand recovery as well as price hike even as higher costs due to rise in crude oil and coal prices impact profits and margins. Competitive prices are compelling cement makers to explore alternatives to coal.
Over the next few months, the demand for coal and pet coke is expected to slow down while the prices would continue to remain high. Although cement prices have also hiked up, the rise is not enough to make up for the fuel prices. The inability to pass on costs fully to customers remains a primary concern. Now with the RBI raising the repo rate demand is likely to continue to shy away.

Founder & Editor-in-Chief, Pratap Padode