The Adani Group has significant business ventures planned in the cement industry.

On Thursday, Adani Group-owned Ambuja Cements announced that it had signed a binding agreement to acquire Penna Cement Industries Ltd (PCIL) for Rs 10,422 crore.

Ambuja will acquire 100% of PCIL’s shares from its current promoters, P. Pratap Reddy and family, as per a company filing to the exchanges. According to sources, Penna Cement has approximately ₹3,000 crore of debt, which includes various forms of funding, non-fund debt, and inter-corporate deposits.

Following a promoter infusion of ₹8,339 crores through warrants in April 2024, Ambuja Cement has cash and cash equivalents totalling ₹24,338 crores, and as stated in the filing, the acquisition will be fully financed through internal accruals.

“This landmark acquisition is a significant step forward in Ambuja Cements’ accelerating growth journey,” said Ajay Kapur, CEO & Whole Time Director of Ambuja Cements.

“By acquiring PCIL, Ambuja is poised to expand its market presence in South India and reinforce its position as a pan-India leader in the cement industry,” he added.

Looking At Facts

PCIL has a cement production capacity of 14 million tonnes per annum (MTPA), with 10 MTPA currently operational. According to the filing, the remaining capacity is under construction at Krishnapatnam (2 MTPA) and Jodhpur (2 MTPA) and is expected to be completed within 6 to 12 months.

Approximately 90% of this capacity has railway sidings, and some facilities are supported by captive power plants and waste heat recovery systems.

Additionally, surplus clinker at the Jodhpur plant will support an extra 3 MTPA cement grinding capacity, bringing the total above the 14 MTPA mark.

PCIL’s existing dealers will transition to Adani Cement’s market network, creating significant synergy, the filing noted.

The expected timeframe for completing the acquisition is 3 to 4 months.

PCIL’s consolidated turnover for the past three years, FY2023-24, FY2022-23, and FY2021-22, stands at Rs 1,241 crore, Rs 2,002 crore, and Rs 3,204 crore, respectively.

The company filing stated that this move will enhance Adani Cements’ market share by 2% across India and by 8% in South India. The announcement was made after market hours, and the stock closed at Rs 663.80 on the NSE, down by Rs 4.90 or 0.73%.

Adani Cement’s Concrete Plans

The Adani Group has a concrete plan involving $3 billion in buyouts in the cement sector.

According to sources, the group is also considering acquiring multiple cement companies, including Gujarat-headquartered Saurashtra Cement, the cement business of Jaiprakash Associates, and Vadraj Cement, owned by ABG Shipyard.

The group has allocated a war chest of $3 billion for these acquisitions and is aggressively pursuing an inorganic growth strategy to increase capacity and become the largest cement manufacturer within the next three to four years, surpassing the Aditya Birla Group’s UltraTech.

India’s cement giants are betting on increased demand as the government advances its infrastructure development plans, fueled by record capital expenditure.

Saurashtra Cement has a market capitalization of Rs 1,487 crore.

In April 2022, Dalmia Bharat signed a definitive agreement with Jaiprakash Associates to acquire its cement, clinker, and power plants for Rs 5,666 crore.

However, the deal was stalled due to shareholder disputes.

Sources indicate that the Adani Group is looking to offer an enterprise value (EV) of $85-120 per ton for these mid-sized cement businesses and is willing to pay a premium if the target company has potential for capacity expansion, limestone mines, and a packing terminal.

The Adani Group’s acquisition of Sanghi Cement, announced late last year, with a capacity of 6.1 MTPA, was at an EV of $100 per ton.

Jaiprakash Associates and Vadraj Cement are currently undergoing bankruptcy proceedings initiated by ICICI Bank.

The National Company Law Appellate Tribunal (NCLAT) has refused to stay the process but has indicated that it may consider a one-time settlement proposal submitted by the company to ICICI Bank.

Ambuja Cement would be the preferred vehicle for acquisitions by the Adani Group, given that it had cash and cash equivalents of ₹24,338 crore on its books at the end of April, strengthened by ₹8,339 crore from the promoter through warrants.

The company is currently debt-free. However, Adani might opt for ACC if there are better synergies, especially in southern India, where the group has a smaller market share.

Top 5 Cement Companies to Command 55% Market Share by FY25

The market share of the top five cement companies increased significantly to 54% as of last December, compared to 45% in March 2015.

According to an ICRA statement on Thursday, this share is also expected to rise to 55% by March 2025, indicating further consolidation in the cement industry.

The top five cement companies include UltraTech, ACC, Ambuja, Shree Cement, and Dalmia Bharat.

Except for the ACC and Ambuja acquisitions by the Adani Group, other mergers and acquisitions in the industry were largely due to the financial difficulties of the acquired entities or groups.

M&A Deals

Anupama Reddy, Vice President and Co-Group Head of Corporate Ratings at ICRA, noted that there have been 15 M&A deals in the cement industry over the past nine years, with an average cost of $80 per tonne, which is lower than the cost of establishing an integrated greenfield cement plant at $110-120 per tonne.

She explained that acquisitions offer ready-made capacity, access to limestone reserves, and avoid the longer gestation periods needed to stabilize operations for greenfield units.

With another asset block of 28 million tonnes in the acquisition pipeline, ICRA expects M&A activity to continue, driven by the aggressive growth plans of large incumbent players aiming to maintain their market share.

The eastern and western regions mainly lead the consolidation occurring across India. The market share of the top five cement companies in these regions is expected to rise to 79% in FY2025, up from 54% in FY2015.

The southern region remains highly fragmented, with the top five players holding only 40% share in FY2015, projected to increase to 50% by FY2025.

The northern and central regions have historically been highly consolidated, with market shares of 65-75% in FY2015, expected to remain in the range of 75-85% by FY2025.

India’s Growing Infrastructure Market, Opportunities for Adani Cements

India’s infrastructure market is experiencing a significant surge, driven by the government’s aggressive push for development and urbanization; with ambitious projects in road construction, railways, airports, and smart cities, the country’s infrastructure sector is set for vigorous growth.

The Indian government has earmarked a record capital expenditure of ₹10 lakh crore ($135 billion) for FY2024.

Parameters Driving this growth include the launch of the

• National Infrastructure Pipeline (NIP) aims to invest ₹111 lakh crore ($1.5 trillion) by 2025 across various sectors, including energy, roads, railways, and urban development.
• Programs like the Pradhan Mantri Awas Yojana (PMAY) and Smart Cities Mission are accelerating urban infrastructure growth, with a focus on affordable housing and modernization of urban areas.
• Likewise, PPPs are crucial in mobilizing private sector investment and expertise in infrastructure projects.
• Rapid urbanization is increasing the demand for better infrastructure and connectivity in cities, leading to higher investments in public transport, utilities, and housing projects.

Adani Cements, Eyeing The Pie

Hence, Adani Cements, part of the diversified Adani Group, is strategically positioned to benefit from the growing infrastructure market in India. Here’s how:

Expansion through Acquisitions

Adani Cements is on an aggressive expansion path, as evidenced by recent acquisitions, including the binding agreement to acquire Penna Cement Industries Ltd (PCIL) and many more may follow. These acquisitions are aimed at increasing production capacity and market presence, particularly in high-growth regions.

Financial Strength

Further, with substantial cash reserves and a debt-free balance sheet, Adani Cements is well-equipped to finance its expansion plans. The company’s strong financial health allows it to undertake large-scale acquisitions and invest in new projects without significant financial strain.

Market Penetration and Synergies

The acquisition of Penna Cement and potential future acquisitions will enable Adani Cements to strengthen its market position, especially in southern India where it has a lower market share.

Hence, leveraging the existing distribution networks and customer base of acquired companies will create formidable synergies.

Strategic Location and Capacity Expansion

The company’s strategic location of plants and expansion projects, such as the upcoming capacities at Krishnapatnam and Jodhpur, will enhance its ability to meet rising demand efficiently. Surplus clinker capacity at these plants will further support increased production.

Leveraging Adani Group’s Ecosystem

Being part of the Adani Group provides Adani Cements with access to a vast ecosystem of resources and expertise which includes logistical advantages from the group’s ports and transport infrastructure, ensuring seamless supply chain management.

The Last Bit: As India’s infrastructure market is on a trajectory of unprecedented growth, Adani Cements is making strategic plans to capitalize on this expanding pie.

For stock watchers perhaps a “neat” bet on Ambuja Cement!