Ambuja Cements Share Price Soars on Penna Deal; Analysts Bullish on Growth

Ambuja Cements has garnered a positive outlook from Jefferies following its announcement of acquiring Penna Cement, based in the South, for ₹10,442 crore. Jefferies has issued a 'buy' recommendation for Ambuja Cements stock, setting a target price of ₹735 per share. The brokerage firm believes that this acquisition will bolster the Adani group's cement company's position as an expanding pan-India leader.

On June 14, Ambuja Cements share price rose by more than 3 percent, as Morgan Stanley views the acquisition as incrementally beneficial for the industry. The international brokerage anticipates that this deal will help Ambuja expand its presence in the southern region. 

Morgan Stanley has stated that the acquisition is expected to support volume growth for Ambuja Cements in the medium term. The firm has maintained an equal-weight rating on the stock, with a target price of ₹665 per share.

Ambuja will acquire the stake from the PCIL promoter group, led by P Pratap Reddy and his family. According to the statement, the acquisition will be entirely financed through internal accruals. This move aligns with Adani's goal of reaching a capacity of 140 million tonnes per annum (MTPA) by 2028 and aims to secure a 20 percent market share by FY28, driven by strong demand for building materials in the country. 

Macquarie has maintained a neutral rating on Ambuja Cements, setting a target price of ₹608. The brokerage anticipates that this acquisition will increase Ambuja's capacity share in the South Indian region to 10-11 percent, up from the current 4-5 percent. 

The deal value, estimated between US$90-100 per ton, exceeds the organic expansion costs for Ambuja Cements and its peers but is consistent with recent acquisitions in the sector, according to the statement. 

Analysts at Macquarie suggest that a crucial aspect to watch is whether this acquisition will enable Ambuja Cements to achieve its capacity target of 140 million tons by FY28. Furthermore, it will be important to observe if the company adjusts its organic expansion plans in response to this acquisition. 

Jefferies suggests that the growing market share of major players like Ambuja Cements could further pressure smaller, less efficient competitors. This development might also trigger more mergers and acquisitions within the sector. 

Penna Cement has an operational capacity of 10 million tonnes, primarily in the South, and a clinker capacity of 7.3 million tonnes, with an additional 4 million tonnes currently under construction. According to CLSA, the deal's valuation is $103 per tonne, which falls within the replacement cost range of $90-110 per tonne. 

Nuvama Institutional Equities notes that although Penna Cement has been dealing with liquidity issues, a successful turnaround, similar to the Sanghi acquisition, could increase its value for Ambuja Cements. Additionally, they mention that a utilization ramp-up at PCIL, which was at 39 percent in FY23, would introduce additional volumes to the market and heighten competition.