Holcim's likely exit key trigger for Ambuja now; cost headwind is another day's worry

Shares of Ambuja Cements have rallied around 30%, and this steep up move is said to be fuelled by new developments around Holcim's India exit. (Photo: Mint)

Lower costs along with better volume growth also helped Ebitda. Ambuja's volumes rose 3% y-o-y to 7.5 million tonne, led by ramping up of capacity at its recently commissioned Marwar plant in Rajasthan, and demand recovery in March after witnessing weakness during January-February, note analysts. Realisations, however, were not that impressive.

Going ahead, analysts caution of cost headwinds for the company.

"Ambuja delivered material turnaround in earnings over last couple of years. The major contributors to this turnaround were multifold increase in volumes under master supply agreement (with ACC Ltd), optimisation of fixed costs and reduction in specific energy consumption. On incremental basis, we don’t see meaningful scope for further cost reduction, analysts at Prabhudas Lilladher said in a report on 29 April.

Consequently, earnings expectations have been toned down. For instance, analysts at IDBI Capital Markets and Securities note that Ebitda beat in Q1 was driven by lower operating cost/tonne, driven by efficiency gain, higher consumption of captive coal. "However, post the result we have cut Ebitda estimate to factor higher imported coal cost. Ebitda for CY22E/23E is cut by 9%/4%," they said in a report 29 April.

But for now, investors are most likely to be focused on the potential Holderind Investments Ltd (Holcim) stake sale.

Media reports state that Switzerland-based Holcim is looking to exit India and is exploring a stake sale in Ambuja Cements Ltd. Holcim holds a 63.19% stake in Ambuja and a 4.48% stake in ACC. Further, Ambuja holds a 50.05% stake in ACC.

If the deal goes through, the buy-outs of Holcim’s stake would lead to mandatory open offers in both listed companies, Ambuja and ACC. Various estimates of brokerages suggest the acquisition cost could be around $10 billion, making it a landmark deal in the cement sector.

"We believe that these assets (Ambuja and ACC) will command significant premium given the quality of brands, country-wide reach and large capacities. At current valuation, we do not see too much upside for Ambuja, but in case of corporate action taking place, aggressive bidding and possible aggressive growth over the next 10 years will make this company attractive again," analysts at Nirmal Bang Institutional Securities said.

Shares of Ambuja were trading flat on the National Stock Exchange on Friday, in a muted reaction to earnings. However, in the past one month, they have rallied around 30%, and this steep up move is said to be fuelled by new developments around Holcim's India exit.

"Near-term share price movements are likely to be governed by news flow related to promoter's exit from India," analysts at Emkay Global Financial Services Ltd said in a report.