The meteoric rise of Gautam Adani and the Adani Group has been the talk of the town in recent years. The Adani Group has grown to be one of the largest business groups in the country. Gautam Adani got the merit of being among the top 5 billionaires in the world, a feat that Mr.Mukesh Ambani also had not achieved. The Adani Group has been busy with a string of acquisitions and making space for themselves in various sectors of the economy. These sectors are the seasoned sectors like cement and power as well as dynamic sectors like green energy, telecom through the distribution of 5G spectrum, etc. The acquisition of Ambuja Cements and ACC Cement by the Adani Group has created quite a buzz in this sector gaining the attention of industry stalwarts and investors alike.
Given below are the details of this acquisition and what it means for the investors at large.
What are the details of the Ambuja cement’s acquisition?
Last month saw the Adani Group adding a new feather to their group of companies by acquiring the stake of Swiss Cement company Holcim’s Indian units Ambuja Cements and ACC. Adani Group has acquired a 63.15% stake in Ambuja Cements and a 4.48% stake in ACC. Holcim already held a 63.62% stake in ACC through their subsidiary and after Ambuja Cements got Holcim in 2016, ACC also became their subsidiary. Adani Group, therefore, holds a 56.69% stake in ACC of which approximately 50% is held through Ambuja Cements.
The approximate value of this acquisition is said to be US$6.5 billion which makes this the group’s biggest ever acquisition across all the verticles. With this deal, Adani Group has now become the second largest cement manufacturer in the country after Ultratech Cements which is part of Aditya Birla Group.
Adani Group has pledged its entire stake in Ambuja Cements and ACC to foreign banks for approximately US$12.5 billion. The company has announced to further infuse Rs. 20,000 crores into the two cement companies. The aim of Adani Group is to become the largest cement-producing company in the country with a combined production capacity of 140MTPA over the next 5 years.
Karan Adani (Gautam Adani’s Son) was recently appointed to be the chairman and non-executive director at ACC and non-executive director at Ambuja Cements. The shares of Ambuja Cement and ACC rose to further heights after Mr. Gautam Adani overtook as the chairman of the company.
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What is in it for the investors?
The market’s immediate reaction to the news of this acquisition in May 2022 was the increase in the share prices of Ambuja Cement and ACC. Ambuja Cements saw an increase of approximately 63% in the share prices while ACC saw an increase of about 30%. The market has since rallied on all major Adani Group stocks and collectively they have seen an increase of over 3600% from FY21 giving them a spectacular rise in their market capitalization. Gautam Adani holds a majority stake in the group companies thereby fueling his own increase in wealth. Most brokerage firms are therefore currently bullish on these cement stocks and are recommended a buy and hold for ACC as well as Ambuja Cements.
There is alo a view among various analysts that investors will find a tough time to make immediate money from these cement giants. These companies have traditionally been trading at an average of 3 times of the book value of the company but are now being traded at an average of five times. These valuations are quite higher than even the market leader in this segment Ultratech Cements. Therefore, unless there is an unprecedented increase in the value of the stocks or if the stocks are being traded at an even higher premium, it will be difficult for the investors to make money in the medium term or short term margin.
Future prospects for the company
Adani Group is banking on the synergies from these companies as well as its in-house support of logistics, and various cost-saving opportunities like reduction in operating costs among others to achieve its vision being the top cement company in the country. Both the companies are already cash rich and the further infusion of Rs. 20,000 crores will help in realising the goals of the conglomerate. Adani Group has the environmental clearance of the more than 25MTPA clinker capacities. This will further help it scale the inorganic growth opportunities.
Adani Group has been making systematic acquisitions and Ambuja Cements and ACC put together gives the group the coveted spot of directly being number two in the cement industry of the country. However, in a bid to do so, Adani Group has added into the already high mountain of debt it has accumulated. The entire stake of Ambuja Cement and ACC has been pledged and the promotors are locked in to their investment till the time the foreign investors deem the loan to be paid.
Today Adani Group is the most heavily indebted conglomerate in the country and has the potential to be the highest NPA ever seen. The advantage for the Adani Group, however, is that it has tied its key businesses and capital investments with the growth and development of the country making them virtually indispensable. Therefore, retail and institutional investors are advised to have a cautious approach in investing in Adani Group purely based on the high volume of debts.
Ambuja Cements and ACC has the combined production capacity of 70 MTPA. Clubbed together, the two companies hold 23 cement plants, 80 ready-mix concrete plants, 14 grinding stations and more than 50000 channel partners across India.
Post acquisition, Adani Group has declared the investment of Rs. 20,000 crores to meet the expectations of the combined companies to achieve increased capacities of over 140MTPA.
Post-acquisition by the Adani Group the increased production capacity of Ambuja Cements and ACC is set to be double of its current combined capacity up to 140MTPA in about 5 years.
Retail investors are advised to have a long term investment approach on stocks of Ambuja Cements and ACC.