ET Intelligence Group: A day after India’s oldest cement manufacturer and its major local shareholder called off their nine-monthold merger talks citing “certain constraints”, shares of both ACC and Ambuja Cements slid in the range of 2-4 per cent on the Mumbai exchanges.
LafargeHolcim, the global parent of the two that together make up India’s second-biggest cement capacity after UltraTech, decided against an immediate formal union late Monday while saying that a merger “remains the ultimate objective.”
Analysts cite the expensive transfer and stamp duty charges involved in transferring mines between ACC and Ambuja Cements as among the key reasons the formal union is stalled. The inability to extract articulated synergies immediately may cause both stocks to face headwinds in the short term.
Under a common ownership, ACC and Ambuja have been operating in different markets with utmost consideration to the fact that both would not expand capacities in each other’s regions to avoid overlapping of operations. ACC has considerable presence in the southern and central regions, while Ambuja has a dominant presence in the western and northern regions. The rationale behind the merger was to save costs at the parent level.
LafargeHolcim had guided that the merger would help in cost savings amounting to Rs 780-900 crore. The parent expected to save Rs 360-420 crore by optimising the supply chain between the two companies. In addition to this, by sharing fixed costs such as human resources, marketing and sales, procurement and finance, the parent planned to save Rs 420-480 crore.
The announcement on calling off the merger discussions has also coincided with rising input costs for the capital-intensive industry, where UltraTech, the Dalmia Bharat and Shree Cement have significantly added capacity and utilisation in the current cycle of consolidation.
In the past nine months, the prices of key raw materials such as pet coke and coal have gone up considerably. Besides this, there have been issues related to the availability of sand, which further adds to the cost of manufacturing cement. Furthermore, cement prices have been weak in the past nine months, providing little scope for margin expansion at least in the short-term. Given this, the merger would have saved some costs for the parent in terms of its Indian operations.
On the valuation front, based on the December 2018 estimates of Kotak Institutional Securities, ACC and Ambuja Cements are trading at a price to earnings multiple of 27.4 and 31.2, respectively. At these price points, the stocks seem fairly valued and adequately capture earnings prospects for the next two years.
