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Recent open market purchases by Holcim in ACC & Ambuja Cements have taken the stake to
over 50% in both companies. While it is logical to expect a merger, we believe it is not imminent
as cultural differences in the two companies could outweigh the financial gains of 6% in EBITDA.
A legal merger could result in cost savings mainly on distribution costs.
The big savings in a merger, would be on 2 cost items: 1) distribution costs: as both the
companies can rationalise plant to market movement matrix, and adopt the most cost
effective movement. Given the breadth of ACC's operations (13 plants) and Ambuja of 7
plants, these could be significant. ACC and Ambuja combined spent around Rs23.8bn in
freight costs in 2010. Based on the estimates it could result in a 10% savings in distribution
costs or Rs2.3bn. Hence, on a combined EBITDA of Rs36bn, this could be around a 6%
upside to 2010 reported EBITDA. 2) Savings in overhead costs would be much smaller. Both
the companies have a combined employee cost of Rs8bn in 2010, and assuming a 5% on this
head would be around Rs400mn. We roughly estimate that savings in costs due to merger
could be around Rs2.7bn, which is around 7.5% of EBITDA.
However, we believe certain issues could delay the merger in our opinion.
Since ACC and Ambuja Cements were companies which had different origins, and promoters,
and hence have a different culture embedded in the employees, there could be certain
integration challenges in merging these two companies.
Besides, both ACC and Ambuja Cements have very strong brand equity due to their long
presence in the Indian markets. A common branding strategy which is crucial for realising
significant cost savings may not be an easy decision for Holcim. We believe, these softer
issues could make a legal merger of the two companies not a very compelling decision for
Holcim.
A legal merger could create a upside of 6-7% to earnings.
ACC trades at $120 EV/mt and Ambuja Cement trades at $150 EV/mt. But ACC is more
expensive on EV/EBITDA at 10x, while Ambuja is cheaper at 9.1x. The combined market
capitalisation of ACC and Ambuja is Rs390bn, and if one adds the cost savings of Rs2.7bn at
10x EBITDA, this could expand combined market capitalisation by around 6.5%. We believe
the premium valuations of ACC & Ambuja due to Holcim frequent open market purchases
largely discounts this upside. Cement prices have rallied by around 14-15% in 2011 so far,
partly due to cost escalations on coal and excise duty front, hence near term earnings would
be strong. However, we remain cautious on the medium-term earnings outlook, given the
industry's low operating rate of 76-77%, and could be prone to over-supply induced pricing
pressure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recent open market purchases by Holcim in ACC & Ambuja Cements have taken the stake to
over 50% in both companies. While it is logical to expect a merger, we believe it is not imminent
as cultural differences in the two companies could outweigh the financial gains of 6% in EBITDA.
A legal merger could result in cost savings mainly on distribution costs.
The big savings in a merger, would be on 2 cost items: 1) distribution costs: as both the
companies can rationalise plant to market movement matrix, and adopt the most cost
effective movement. Given the breadth of ACC's operations (13 plants) and Ambuja of 7
plants, these could be significant. ACC and Ambuja combined spent around Rs23.8bn in
freight costs in 2010. Based on the estimates it could result in a 10% savings in distribution
costs or Rs2.3bn. Hence, on a combined EBITDA of Rs36bn, this could be around a 6%
upside to 2010 reported EBITDA. 2) Savings in overhead costs would be much smaller. Both
the companies have a combined employee cost of Rs8bn in 2010, and assuming a 5% on this
head would be around Rs400mn. We roughly estimate that savings in costs due to merger
could be around Rs2.7bn, which is around 7.5% of EBITDA.
However, we believe certain issues could delay the merger in our opinion.
Since ACC and Ambuja Cements were companies which had different origins, and promoters,
and hence have a different culture embedded in the employees, there could be certain
integration challenges in merging these two companies.
Besides, both ACC and Ambuja Cements have very strong brand equity due to their long
presence in the Indian markets. A common branding strategy which is crucial for realising
significant cost savings may not be an easy decision for Holcim. We believe, these softer
issues could make a legal merger of the two companies not a very compelling decision for
Holcim.
A legal merger could create a upside of 6-7% to earnings.
ACC trades at $120 EV/mt and Ambuja Cement trades at $150 EV/mt. But ACC is more
expensive on EV/EBITDA at 10x, while Ambuja is cheaper at 9.1x. The combined market
capitalisation of ACC and Ambuja is Rs390bn, and if one adds the cost savings of Rs2.7bn at
10x EBITDA, this could expand combined market capitalisation by around 6.5%. We believe
the premium valuations of ACC & Ambuja due to Holcim frequent open market purchases
largely discounts this upside. Cement prices have rallied by around 14-15% in 2011 so far,
partly due to cost escalations on coal and excise duty front, hence near term earnings would
be strong. However, we remain cautious on the medium-term earnings outlook, given the
industry's low operating rate of 76-77%, and could be prone to over-supply induced pricing
pressure.
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