Shares of Nuvoco Vistas surged 11% to Rs 446.3, while Chennai-based
gained 9% to Rs 289.9. , , , and jumped over 5% each. Ambuja Cement shares also gained 9.3% to Rs 564.9.
“The anticipation of bigger acquisitions in the industry is driving the valuation re-rating of regional and smaller players, which are trading at a discount to replacement cost,” said Gautam Duggad, head of research,
. “A few players are finding it difficult to pare their leverage and may be willing to exit the cement business at good valuations.”
Days after completing a $6.5-billion buyout of Ambuja Cement and ACC, the new management announced it’s targeting an installed capacity of 140 mtpa (Million Tonne Per Annum) over the next five years. The Adani group forayed into the cement business by acquiring Holcim’s stake in Ambuja Cement and ACC with a combined grinding capacity of 68 mtpa.
“Immediate target companies for Adani could be in regions where it has relatively lower market share, to ensure faster approvals from the Competition Commission of India,” Devesh Agarwal, analyst,
. “Organic expansion is likely to be constrained by other challenges, such as long gestation periods of greenfield projects, costly new limestone mining lease, capacity constraints of equipment suppliers.”
Many regional cement players have not added capacities over the last few years and they have lost market share. Analysts said the replacement cost of cement plants is in $100-120 per tonne range. Acquisition of a cement company has been historically at $106-151 per tonne. Many mid- and small-sized companies are trading at an enterprise value per tonne of $48-87. Historically, a valuation premium is assigned to assets based on their ability to generate cash flows and their market presence or operational efficiency.
The overall outlook for the cement sector is also expected to improve in the coming months as the earnings downgrade cycle is likely to bottom out with September 2022 quarter earnings, said analysts.
“The December 2022 quarter could see benefits from lower fuel prices, while January-June 2023 could see both better cement demand and prices in a seasonally strong period,” said Krupal Maniar, analyst, Antique Stock Broking.
