ACC, Ambuja shares fall on negative sentiment
Mumbai: Shares of both ACC Ltd and Ambuja Cements Ltd slipped on Tuesday after they announced that “there are currently some constraints to implement a merger”. Analysts said calling off of the merger between ACC and Ambuja Cements will weigh on investor sentiments.
During the day, shares of ACC fell as much as 2.4% to Rs1,623 apiece, while Ambuja shares declined as much as 4.46% to Rs250.60 apiece.
In May 2017, Ambuja and ACC had announced the possibility of a full merger between both the companies. However, the board instead approved the sale and purchase of materials and services between Ambuja and ACC. Since 1 May, ACC has risen 1%, while Ambuja Cements is up 2.6%, much lower than the benchmark index Nifty’s rally of 13.7% in this period.
Kotak Institutional Equities said the announcement could weigh on sentiment in the short term as the Street was more optimistic on potential synergy benefits while valuations are already steep. “Ambuja’s valuations are rich at 11 times EV/EBITDA (attributable) on 2019 earnings, even after factoring in EBITDA growth at 22% CAGR (compounded annual growth rate). ACC on the other hand trades at 12 times EV/EBITDA on 2019, with continued risk to earnings from weak cement prices, and increase in pet-coke prices to over $99 per tonne. Low profitability for ACC implies higher price leverage compared to other pan-India players making earnings more volatile,” it said in a report on 27 February. EV stands for enterprise value, and Ebitda for earnings before interest, tax, depreciation and amortization.
According to the brokerage firm, regulatory costs may have outweighed synergy benefits. It said that high regulatory cost like stamp duty and transfer charges for limestone could have been higher than freight. “We further highlight that ACC and Ambuja have been under common ownership for a while now, and ensured not to put incremental capacities in overlapping markets. So while ACC has a large presence in South and Central with Ambuja having no presence in South, ACC on the other hand is more dominantly present in the West and North,” it added.
Credit Suisse was cautious on the cement sector, stating that development is weaker than market expectations. “The market was expecting a full merger and therefore higher synergies than the current form of reduced material swap will realise. Ambuja presented synergies of Rs900 crore through the merger in 2013 and out of that less than half of the synergies were to come from the material swaps,” Credit Suisse said.
Rating agency Icra Ltd was, however, optimistic that cement demand growth is likely to increase by 4-5% in FY2019. It expected demand growth of around 3% in FY2018. In Q1 FY2018, cement production declined by 3.3% on a year-on-year basis. This was primarily due to the various local issues across regions such as sand shortage, implementation of the Real Estate Regulatory Authority (RERA) Bill and drought. In Q2 FY2018, the goods and services tax (GST) transitional issues, the monsoons and continued sand unavailability were the factors which impacted demand.
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