Ambuja Cement gets ‘hold’ rating from JM Financial; TP at Rs 260

Board of ACC/Ambuja have announced that the companies will not pursue the proposed merger for the time being owing to some constraints on its implementation. However, Boards have approved mutual sale and purchase of materials/services details of which will be announced later. We believe that deferral of merger will limit the expected synergies, thus impacting multiple re-rating especially for ACC (FY19 EV/EBITDA 13x Ambuja against 11x ACC). The arrangement between Holcim group companies could be positive for Ambuja if the clinker availability is improved through supply chain optimisation. We await the details of the arrangement to analyse the benefits derived from the process. We have HOLD rating on both the companies. Management had first indicated to the possibility of merger at the time of restructuring between ACC/ACEM in 2013 with synergies of `9 billion. ACEM-ACC had announced a possibility of merger (with a combined capacity of 63 MT) in May 2017 with formation of Special Committee of Directors analysing the same.

The Special Committee of Directors announced that, though the merger remains the ultimate goal, company will not pursue it currently owing to some constraints on its implementation. However, board of both the companies have approved an arrangement for mutual sale and purchase of materials and services on agreed terms post the approval from shareholders. In 2013, ACC-Ambuja had indicated a merger synergy of Rs 9 billion of which Rs 3.6-4.2 billion was linked to material swap and Rs 4.2-4.8 billion was linked to shared services and fixed costs. We believe, realisation of later will be much lower in the current form of arrangement as back end processes (Marketing/Sales, HR, Finance) are likely to remain separate while procurement could be streamlined.

Limited Synergy benefit could limit the re-rating of ACC (EV/EBITDA CY19 at 11x against Ambuja at 13x). Improvement in clinker supply through supply chain optimisation, on the other hand, could be positive for Ambuja as the company faces clinker capacity constraint over next 2 years (93.5% clinker utilisation expected in CY18). Key aspects of the arrangement we will be monitoring are 1) Supply chain optimisation especially linked to clinker; 2) Services sharing if any; 3) cost of clinker/services proposed; and 4) role of parent Holcim in the arrangement. We have hold on Ambuja (TP INR 260) and ACC.