Did Ambuja pay too much for Oriental Cement?

As consolidation in the cement industry gathers pace, Ambuja is expanding capacity despite lofty valuations and weak earnings weighing on the sector’s short-term prospects.

The acquisition will add 8.5 million tonnes of operating capacity to Ambuja’s portfolio covering Telangana, Karnataka and Maharashtra. In addition, Orient’s limestone mining lease in Chittorgarh, Rajasthan, offers the potential for an additional 6 million tonnes of capacity in northern India.

Competing for Southern Market Share

Ambuja’s move is part of a broader trend in which cement companies are positioning themselves to benefit from rising demand driven by infrastructure in southern India.

UltraTech Cement and Ambuja have been particularly active, with the latter acquiring Penna Cement in June for $125 per ton. Penna’s 10 million ton operating capacity $The enterprise value of Rs 10,422 crore reflects the strategic importance of the southern-focused assets, with Amravati, the capital of Andhra Pradesh, expected to spur cement consumption in the southern region.

The 2024 EU budget further strengthens this claim, allocating $15,000 crore for development and investment by Amravati in backward areas of Andhra Pradesh. This wave of regional development has cement companies scrambling to acquire production capacity to meet an expected boom in demand.

Is the valuation fair or overvalued?

Ambuja’s acquisition of Orient at US$114 per ton is in line with market trends. In July, UltraTech acquired 32.7% stake in Indian Cements $The price is US$390 per share and the valuation per ton is US$111.

Ambuja’s financial strength (reflected in cash reserves) despite concerns over paying too much $18,299 crore at the end of June – indicating that the company is ready for strategic acquisitions.

Ambuja’s latest acquisition also advances its target of reaching 100 million tonnes of capacity by fiscal 2025, building on the 89 million tonnes of capacity it held through subsidiaries ACC, Penna Cement and Sanghi Industries at the end of June.

For more analysis like this, read profit pulse.

Meanwhile, UltraTech’s production capacity reached 150.7 million tons in October, highlighting the fierce competition among India’s cement giants.

Despite strategic potential, Ambuja shares fell 2.4% to $Oriental Cement shares fell 2.5% to 558 on Tuesday $343.4, the market is weak. However, Ambuja’s long-term momentum has been strong, with its shares up 35% in the past year, beating the benchmark Sensex’s 24% gain.

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Cement companies place their hopes on $11.11 trillion capital expenditure announced in the July budget to boost infrastructure development is likely to boost cement demand and support long-term growth.

Profit pressure

However, recent earnings have been disappointing.

UltraTech Cement reports operating profit down 35% year-over-year $Revenue fell 4% year-on-year to Rs 796.9 million in the quarter ended September. $14,905 Crores. Realization also dropped 8.4% year-on-year $4,901 per ton, reflecting weak pricing power.

High valuations for cement stocks add another layer of worry. Ambuja trades at over 50 times earnings, while UltraTech trades at over 60 times. These multiples suggest cement stocks are expensive in the short term, especially given the sector’s poor earnings performance.

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While high valuations may deter some investors, consolidation in the sector and ongoing government-driven infrastructure projects present a compelling long-term investment story. Cement companies such as Ambuja and UltraTech are gearing up for the next wave of growth, hoping India’s infrastructure expansion will spur continued demand.

Note: The data in this article comes from press releases, company websites and mainstream media.

Amriteshwar Mathur has over 20 years of experience in financial journalism.

Disclosure: The author has been a shareholder of Ambuja Cement for nearly twenty years.