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The cement sector is in the headlines, yet again, but this time, it is not for cost inflation pressure issues. Investors in the sector may need to prepare for the announcement of a landmark deal. Media reports said that Switzerland-based building materials conglomerate Holderind Investments Ltd (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 Ltd. It should be noted that Ambuja also holds a 50.05% stake in ACC. Clearly, if and when such a deal goes through, there would be repercussions not on these stocks but for other companies as well.
For ACC and Ambuja a change of ownership could be a re-rating event, note analysts. Investors would reckon that both these companies have been losing market share due to capacity constraints. This is at a time when their close competitors Ultratech Cement Ltd and Shree Cement Ltd were expanding their footprints across regions aggressively.
During the calendar year 2011-2016 Holcim has lost 460 basis points (bps) market share due to weaker capacity addition, according to Axis Securities Ltd. One basis point is 0.01%. During this period, Shree Cement/ UltraTech added 220bps and 630bps of volume share, respectively, said the Axis report.
Perhaps, a whiff of this potential deal has got investors excited. In April so far, the Ambuja stock has sharply outperformed peers ACC, Ultratech and broader market, likely reflecting market anticipation for the merger & acquisition news, said analysts at Jefferies India. “In the near-term, while both these stocks may remain afloat on deal newsflows, driving outperformance versus other large-cap peers, Ambuja's recent sharp up-move tilts our preference towards ACC," added the Jefferies report.
But a bigger near-term positive could come in the form of improved ability to raise prices. Analysts at HDFC Securities Ltd note that, the delays in the sell-off, owing to its mega deal size, regulatory approvals, etc. could potentially derail the focus on ACC and Ambuja's planned expansions. "This would be good news for the industry as a slower pace of capacity addition will reduce the demand-supply imbalance, supporting industry’s pricing power," said the domestic brokerage house in a report dated 18 April.
That said, since market share loss has been an irritant for shareholders of ACC and Ambuja, the new buyer is expected to go full-throttle on fixing this. "In the last decade, Holcim India has lost market share and an unlikely leeway under a new promoter. We see an emerging overhang of market disruption and risk of de-rating on leaders – Ultratech Cement and Shree Cement Ltd," analysts at Kotak Institutional Equities said in a report on 18 April. According to media reports, Holcim is in early-stage negotiations with the Adani and JSW Group for this deal.
Meanwhile, Holcim’s exit from its India cement business should be viewed in the backdrop of its strategy to reduce its carbon footprint by 2025. The company aims to cut its cement business to around 35% of revenue in calendar year 2025 from 55% in calendar year 2021. Indonesia, Malaysia, Singapore and Brazil are among the regions where Holcim has already off-loaded its stake in the cement business.