The Adani effect: Ambuja Cements rallies 40% in one month – analysts suggest good days ahead for the cement industry

• Gautam Adani’s acquisition of Ambuja Cements and ACC from Holcim has sent the stocks of both the companies rallying, adding over ₹40,000 crore to investor wealth in the last one month.
• While the Adani effect might have triggered the rally, analysts believe it will be a while before the two cement giants can improve their key operating metrics.
• Overall, though, analysts say the Indian cement industry is ‘well-poised’ thanks to a demand upcycle and consolidation on the horizon.

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

But beyond the superficial aspect and the Adani spin, analysts believe that the ₹20,000 crore capital infusion could prove to be a net positive for both Ambuja and ACC, as well the cement industry.

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


Source: NSE, as on September 20, 2022

Overall, UltraTech, Shree Cement and Dalmia Bharat have underperformed Ambuja and ACC, even without considering the recent rally in the two Adani Group companies.

However, analysts are of the view that the Indian cement industry is all set for a multi-year demand upcycle – and that this time around, it is different from the 2010 cycle. Essentially, the current upcycle will see focused capacity additions via consolidation instead of building up new capacity.

“The Indian cement sector will recalibrate on multiple fronts in the next three years. We expect demand, too, to see a 7% CAGR in FY 2022-26E after a tepid FY 2019-22 and keep utilization stable. Large players should remain acquisitive and aid in sector consolidation,” said a report by Kotak Institutional Equities, noting that UltraTech Cement and Dalmia Bharat are ‘well-placed’ in the long-term.

Analysts at Morgan Stanley echoed similar sentiments, and said that the capital infusion in Ambuja Cements is a ‘net positive’ for the cement industry in the medium term.

“Unlike then, new capacity addition is now concentrated at larger players. This lowers the risk of unjustified capacity additions in this cycle, in our view, and thereby lowers the risk of price war,” the report added, suggesting that margins could remain intact as a result.


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


Source: Company reports | Revenue and net profit as at June, 2022. Market cap as on September 20, 2022.

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

Capacity utilization also is considerably lower for Ambuja and ACC. It stands at 65% according to the Morgan Stanley report. UltraTech Cement reported a capacity utilization 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 towards capacity expansion – fully organic, an equal mix of organic and inorganic, and fully inorganic.

In the best case scenario, the Morgan Stanley report states that Ambuja and ACC’s capacity utilization could increase to 73% by FY27, if the company uses ₹20,000 crore towards acquisition of companies like Nuvoco, Ramco, JK Cement, India Cement, among others.

The report states that it usually takes 4-5 years to utilize the new capacities after commissioning them, so the inorganic mode will be the fastest way to improve utilization levels.

What does this mean for Ambuja and ACC?

Despite noting that Ambuja-ACC could see margin improvements given the Adani Group’s track record – Adani Ports drastically improved the margins of different ports post-acquisition – analysts at Morgan Stanley see little scope for re-ratings and upgrades.

“Current cost structures for both ACC and ACEM will keep medium-term profitability in check. ACC and Ambuja shares have outperformed peers YTD and current valuations are not cheap relative to peers, limiting any re-rating triggers and hence upside potential,” the report said, maintaining its ‘underweight’ rating for both the companies.

Kotak Institutional Equities maintains that the overall industry outlook is ‘well-poised’, but with a disclaimer.

“We find the sector dynamics favorably placed in the medium-to-long term with robust demand offsetting supply additions, strong balance sheet driving investments for cost savings cum decarbonization goals and increasing consolidation,” the report said, adding that in the near term, cost pressures could keep margins in check.


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