With Penna acquired, Ambuja Cements stock will rise; Jefferies and Morgan Stanley are optimistic about volume growth

With a target price of Rs 735 per share, Jefferies has issued a 'buy' recommendation on Ambuja Cements after the news of its purchase of Penna Cement Industries for Rs 10,442 crore.

Ambuja Cements of the Adani group will pay Rs 10,422 crore to buy a 100% share in Penna Cement Industries.

Jefferies issued a positive call to Ambuja Cements on the announcement that it will be purchasing South African company Penna Cement for a sum of Rs 10,442 crore. Jefferies has set a target price of Rs 735 per share for the Ambuja Cements shares, with a "buy" rating. According to the brokerage, the purchase will enhance the Adani Group Cement Company's standing as a developing leader in all of India.

On June 14, Ambuja Cements' stock is probably going to rise since Morgan Stanley thinks the purchase would help the sector gradually. With this transaction, Ambuja is expanding its presence in the south, according to the international brokerage.

Morgan Stanley maintained an equal-weight rating on the company with a target price of Rs 665 per share, stating that the purchase could help volume growth for Ambuja Cements over the medium term.

Amubja will purchase the interest from P Pratap Reddy and family, the PCIL promoter group. The announcement states that internal accruals will cover the whole cost of the transaction.

In light of the strong demand for construction materials in the nation, Adani plans to achieve a capacity of 140 million tonne per year (MTPA) by 2028 and to gain a 20 percent market share by FY28.

Macquarie has set a target price of Rs 608 for Ambuja Cements, maintaining a neutral position. The firm anticipates that this purchase would increase the cement maker's capacity share in the South Indian area from the current 4-5 percent to 10-11 percent.

The transaction figure, which is estimated to be between US$90 and US$100 per ton, is in line with previous acquisitions in the industry but more than Ambuja Cements and its competitors' organic growth expenses.

Analysts at Macquarie said that one important thing to watch out for is if this purchase would enable Ambuja Cements to meet its FY28 capacity goal of 140 million tons. It will also be crucial to see whether, in the wake of this purchase, the business reevaluates its ambitions for organic development.

Following the news, Jefferies issued a buy call on the cement stock, with a target price of Rs 735 per share. This transaction, with the increased capacity included, suggests an appealing EV/tonne of $80-90. According to the brokerage, the purchase strengthens Ambuja Cements' strong position as a rising leader in pan-India and vaults it into the top three in the South.

Jefferies argues that smaller, less effective businesses may be further squeezed by the growing market share of large competitors like Ambuja Cements. This trend may also result in other mergers and acquisitions within the industry.

With a 4 million tonne expansion under development, Penna Cement has an operating capacity of 10 million tonne (mostly in the South) and a 7.3 million tonne clinker capacity. In contrast to the replacement cost, which is between $90-110 per tonne, CLSA values the agreement at $103 per tonne.

Ambuja Cements said that with this purchase, its overall capacity would reach 91 million tonnes, a step closer to its goal of 140 million tonnes by FY28.

The global brokerage said that inorganic growth has less of a negative effect on the industry's supply-demand equilibrium. Ambuja Cements is the subject of a sell call from CLSA, with a target price of Rs 575 per share.

Citi has set a neutral call on Ambuja Cements shares, with a target price of Rs 675 per share, in the meanwhile. Penna Cement has 630 million tonnes of clinker reserves as of 2021. The brokerage company calculates the enterprise value per tonne of the sale at around $93, which is in the ballpark of the greenfield replacement cost. They see the deal favorably as it indicates Ambuja Cements is fulfilling its expansion objectives.

Nuvama Institutional Equities claims that even if Penna Cement has been having financial problems, a possible turnaround (like to the Sanghi purchase) might increase the value for Ambuja Cements. Simultaneously, it said that PCIL's ramp-up in utilisation (to 39 percent in FY23) would increase market volume and boost competitiveness.

"We appreciate Ambuja Cements' robust capital expenditure plans and efforts to improve cost effectiveness," Nuvama said, maintaining its "Buy" rating on the shares with a target price of 767 based on FY26E EV/EBITDA of 18x.