Cement India: Bernstein weighs in on possible acquisition targets

Investing.com -- Bernstein analysts in a note dated Monday weigh in on the ongoing battle for dominance in the Indian cement industry, with a focus on potential acquisition targets. 

As the fight between Ambuja (NS:ABUJ) and UltraTech Cement (NS:ULTC) intensifies, the note assessed which companies might be attractive options for acquisition.

The note flags geographical synergy as a crucial factor for acquisitions. “We can see clear white-space where Ambuja does not have a presence, and which get complimented if it acquires players like Heidelberg/ Sagar/ KCP/ NCL / Deccan,” the analysts said. 

These companies are situated near Amravati, an area expected for development with government backing.

Beyond geographical considerations, Bernstein suggests that financially stressed companies could be prime acquisition candidates. 

Players with high leverage (through debt or pledged shares), low sales realization, and low capacity utilization are seen as more likely to be receptive to a buyout. 

In this context, Sagar Cements (NS:SGRC) stands out as a potential target, with factors like high debt and low profitability making it a good fit for a larger brand seeking operational synergies.

The note also emphasizes valuation as a significant factor. Bernstein suggests that companies trading below the estimated cost of setting up a new greenfield plant (about $100 per tonne) could be attractive options. 

Based on this metric, Sagar Cement, NCL, and Deccan emerge as the cheapest options in the market.

Bernstein acknowledges the possibility of Heidelberg exiting the Indian market, citing their history of divesting cement assets globally. This could create additional acquisition opportunities for other players in the sector.

The note expresses concerns about oversupply and price wars impacting valuations. Given the high valuations and willingness of larger players to pay acquisition premiums, Bernstein suggests that investors might consider focusing on potential targets rather than established players.

The report provides target prices for Ultratech Cement (9,006 Indian rupees), Ambuja Cements (520 rupees), and Shree Cement (27,541 rupees), derived from estimated future earnings. 

Bernstein also identifies potential risks including demand volatility, margin compression, and regulatory uncertainties.