Major shift in Cement sector – provides a trading opportunity.

India has seen a steadily increasing cement demand ever since 1995 .Cement companies are fragmented across nation and are very sensitive to both input cost and supply / demand. Cement industry is led by 7 major players who hold approx 60% market share in India.

Ultra Tech22%
Ambuja7.4%
ACC7%
Shree Cements7.5%
Birla Corporation3.5%
Dalmia Bharat5.5%
India Cements3.5%

Background:

India’s two major brands ACC and Ambuja which constitute to over 15% market share and has a combined value of $24 billion may be up for sale.

As per the Bloomberg.com report, the largest share holder of ACC and Ambuja i.e Swiss giant HOLCIM is “gauging interest in its controlling stake in Ambuja”, the people familiar with the matter said. Ambuja has a market value of around $9.6 billion, and Holcim holds a 63.1 per cent stake in the company via Holderind Investments Limited. In ACC, Holderind Investment directly holds another 4.48 per cent stake.

Whats next ?

India corporate landscape is changing fast in recent times we have seen a lot of horizontal and vertical mergers of large corporates in last 3 years. If this sell off goes through to a strategic investor such an existing cement player then it will attract the attention of CCI ( Competition Commision of india). So there are less likely chances of any horizontal mergers. On the other hand India’s wealthiest business house ADANI Group which has recently forayed into Cement business might be the most suitable bidder for this acquisition. If you see , ADANI group has been seriously investing in Infra business such roads , airports , etc. Hence a major cement player will be a massive kick starter for the groups ambitions. We cant rule out other players like JSW or TATA group or one of the wealthiest man of India i.e Mr. RK damani who has a significant share holding in India Cements. As of now all is speculation and we don’t know whats going to happen. However there is some accumulation happened in both these stocks and Ambuja Cements has rallied 20% in last 2 weeks .

Trading Strategy

Well it would require a lot of risk appetite to trade these stocks with such news floating around , but if you ask me ill put my money on Ambuja cements as the reach , brand pedigree and relative valuation of Ambuja cements provides the cushion to take on the risk.

At current price of 369 Ambuja is fairly priced , but if any acquisition comes in the premium will be around 30% from here which is what we anticipate. Ambuja is a debt free company and pays out 70% of its net earnings as dividend. It is the only company which has maintained a ROCE of over 20% consistently which is too good considering the sensitive nature of the business.

Another stock to track would be Ultra Tech cements , if this acquisition goes through ultra tech may face some challenges from large business house who’s management is more of an Indian landscape as opposed to HOLCIM for whom indian market may not be a core business geography.

We would not advise any trades here , however please keep on tracking this news and trade as per your risk appetite.

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