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The Adani Effect: Ambuja Cements Up 40% in One Month – Analysts Predict Good Days for the Cement Industry

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  • Gautam Adani’s acquisition of Ambuja Cements and ACC from Holcim has boosted the shares of both companies, adding more than ₹40,000 crore to investor wealth in the past month.
  • While the Adani effect may have caused the rally, analysts believe it will be some time before the two cement giants can improve their key operating metrics.
  • Overall, however, analysts say India’s cement industry is “well balanced” thanks to an upturn in demand and consolidation on the horizon.

Gautam Adani’s acquisition of the cement giants Ambuja and ACC from Holcim has sparked a rally in both stocks, adding more than ₹40,000 crore to investor wealth in the past month. The Adani effect has clearly had an impact on these two cement companies.

But aside from the superficial aspect and the Adani spin, analysts believe that the ₹20,000 crore capital injection could be net positive for both Ambuja and ACC as well as the cement industry.

Here’s how other cement company stocks have performed this year:

Company Current price YTD Performance
Ambuja cements ₹572 48%
ACC ₹2.715 20.6%
UltraTech cement ₹6.468 -16.3%
Shree Cement ₹23,230 -14.8%
Dalmia Bharat ₹1.710 -9.1%

Source: NSE, as on September 20, 2022

Overall, UltraTech, Shree Cement and Dalmia Bharat underperformed Ambuja and ACC, even without taking into account the recent rally in the two companies of the Adani Group.

However, analysts believe the Indian cement industry is all set for a multi-year demand rebound – and this time it will be different from the 2010 cycle. Essentially, the current upcycle will lead to targeted capacity expansions through consolidation rather than building. of new capacity.

“The Indian cement industry will be reassessed on several fronts over the next three years. We also expect demand to see a 7% CAGR in FY 2022-26E after a lukewarm FY 2019-22 and keep usage steady. Major players need to maintain purchasing power and contribute to the consolidation of the sector,” said a report by Kotak Institutional Equities, noting that UltraTech Cement and Dalmia Bharat are “well placed” in the long run.

Analysts at Morgan Stanley shared similar sentiments, saying the capital injection into Ambuja Cements is a “net positive” for the cement industry in the medium term.

“Unlike then, new capacity expansion is now concentrated with larger players. In our view, this reduces the risk of unwarranted capacity expansions in this cycle and thus the risk of a price war,” the report said.

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Gautam Adani’s acquisition of Ambuja Cements and ACC from Holcim has boosted the shares of both companies, adding more than 40,000 crore to investor wealth in the past month. While the Adani effect may have caused the rally, analysts believe it will be some time before the two cement giants can improve their key operating metrics.


Here’s how India’s top cement manufacturers compare:

Particularities Ambuja Cem ACC UltraTech Shree Cem Dalmia Bharat
Revenue ₹8.033cr ₹4.468cr ₹15.164cr ₹4.415cr ₹3.302cr
Net profit ₹752cr ₹227cr ₹1,584cr 280cr 196cr
Total capacity 31 mtpa 37 mtpa 120 mtpa 47 mtpa 36 mtpa
Market capitalization ₹1,14,402cr ₹50.839cr ₹1.88.538cr ₹84,464cr ₹32.089cr
P/E ratio 48.35 37.55 26.11 42.63 29.22

Source: Company Reports | Turnover and net profit as of June 2022. Market capitalization as of September 20, 2022.

Even with a combined capacity of 68 mtpa, the Ambuja-ACC duo is still almost half behind the market leader UltraTech Cement.

The occupancy rate is also considerably lower for Ambuja and ACC. It stands at 65% according to the Morgan Stanley report. UltraTech Cement reported an occupancy rate of 83% in the June 2022 quarter.

The report outlined three scenarios for Ambuja and ACC in terms of using the INR 20,000 crore capital infusion for capacity expansion – fully organic, an equal mix of organic and inorganic, and fully inorganic.

At best, the Morgan Stanley report states that Ambuja and ACC occupancy rates could rise to 73% in FY27, if the company uses ₹20,000 crore to acquire companies such as Nuvoco, Ramco, JK Cement, India Cement, among others. others.

The report states that it usually takes 4-5 years to use the new capabilities once they are put into service, so the inorganic mode will be the fastest way to improve usage levels.

What does this mean for Ambuja and ACC?

Despite the statement that Ambuja-ACC could see margin improvements given the track record of the Adani Group – Adani Ports dramatically improved the margins of several ports after the acquisition – analysts at Morgan Stanley see little room for revaluations and upgrades.

“Current cost structures for both ACC and ACEM will keep profitability in check in the medium term. ACC and Ambuja stocks have outperformed peers YTD and current valuations are not cheap compared to peers, limiting any revaluation triggers and thus upside potential,” the report said, citing its ‘underweight’ rating for both companies. maintained.

Kotak Institutional Equities says the overall outlook for the sector is “well balanced” but with a disclaimer.

“We find industry dynamics favorably placed over the medium to long term with robust demand offsetting supply additions, strong balance sheet driving investment towards cost savings and decarbonisation targets and increasing consolidation,” the report said, adding that in the near term, cost pressures can keep margins under control.

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