Ambuja Cement Eastern

 Ambuja Cement Eastern-Are the first steps to a merger with ACC being taken?
BSE 532201; CMP Rs 94, BUY
12 month target: Rs 160
Upside: +70 per cent
Equity Capital: Rs 193 crore
Market Cap: Rs 1814 crore
Promoter holding: Holcim 97 per cent
Public Holding: 50 lakh shares worth Rs 47 crore
CY05 EPS Rs 3
CY06 EPS e Rs 7 to Rs 8
To merger or to sell-out?
The new Sebi norms for listing of shares which have come into effect from May 1, 2006 provide that the minimum public shareholding in a corporate entity seeking listing is 25 per cent. There are two exemptions to this rule; one, the corporate has a market capitalisation in excess of Rs 1000 crore which ACEL has and the company should be in the infrastructure segment.
Though it is debatable whether Cement can be considered a infrastructure sector or not, it is clear that ACEL has a public holding of less than 10 per cent, which is lower than even the most liberal norms provide.
Now, there are two options available to ACEL-to sell its stock in the market so as to bring public ownership to 75 per cent, or to Buy-Out the remaininig stakeholders through the Reverse Book Building route, which process can be expensive but fast. Or merge ACEL with one of its two other companies in India-ACC and Gujarat Ambuja.
Latest Developments
On Saturday, in a block deal executed at 9.55 AM, Ambuja Cement India the Holding company for Holcim in India, sold 10.73 lakh shares of ACEL at a price of Rs 87.5. Incidentally, the buyers identity was not revealed.
However, the media has speculated that the Swiss cement giant Holcim is learnt to have indicated to the Securities and Exchange Board of India (Sebi) that it is weighing the option of merging ACC — in which it owns 34.7per cent through majority-held Ambuja Cement India (ACIL) — with Ambuja Cement Eastern (ACEL).

Holcim’s plan, it is learnt, was conveyed to the markets watchdog after it clarified that ACEL, in which ACIL owns 97 per cent, needs to shore up its public shareholding — which is way below the mandatory 10 per cent — in case it wants to remain a publicly-listed entity.

Although ACEL has taken a year’s time since the open offer in May 2005 it has not been able to increase the public shareholding. It seems Holcim has apparently made it clear that the need to do so may not arise as it does not see the need to have two listed firms in India, and would work towards amalgamating them.
Apart from the regulatory compulsions, however, the move to marry ACC with ACEL would serve another crucial purpose: Holcim, which failed to make ACC its subsidiary through an open offer, could end up with a 50 per cent shareholding in the merged entity. Given the fact that the Holcim-controlled ACIL holds a 97 per cent stake in ACEL, which also has a fairly large capital base. The exact shareholding, however, would depend on the swap ratio.

ACEL’s share capital at Rs 192.4 crore is higher than that of ACC at Rs 179.6 crore, and a merger would allow Holcim to use the former’s large capital base as a currency to shore up its shareholding in the merged entity.
ACEL’s cement capacity however is just around 2m tonne, as against 18m tonne of ACC. ACIL, which owns stakes in both ACC and ACEL, is 67per cent owned by the Swiss firm, while the balance 33 per cent is owned by Gujarat Ambuja Cements, the country’s fourth largest cement producer.
Early on in 2005, the media had reported that Holcim was looking at merging ACC with ACEL. Holcim spokesperson Ronald Walker had then said: "We are still in the process of completing the acquisition of ACC stock tendered under the open offer. As such it is premature to discuss future options for increasing stake in ACC.
Specifically, a potential merger between ACC and ACEL is not under consideration at this time."

Industry observers believe that the move to merge ACC and ACEL could now gather momentum. Moreover, with ACC and ACEL having a strong presence in the eastern region, a merger will bring in a lot of synergies and augur well for shareholders, say analysts.

Holcim, which was targeting a shareholding of 50 per cent in ACC through the open offer, fell short after it failed to get the desired response from shareholders. Industry observers say that the creeping acquisition route — which allows a promoter to buy 5per cent in the company every year — could be a little tedious as Holcim would then have to wait another three years to hit the magic figure of 50per cent in ACC.

A creeping acquisition would delay Holcim’s plans to consolidate ACC with its worldwide operations. And after pumping in $ 1 bn in India already, Holcim may not want to wait that long.
Another point is the changed Cement dynamics
For the first time in a decade Cement manufacturers are able to extract price increases from buyers, as the country’s growth catches speed. Investors would note that inspite of a large Equity and a low EPS for calendar 2005, Ambuja Cement Eastern paid a huge tax of Rs 54 crore in CY05.
Post tax it still managed to report profits of Rs 60 crore. So profitability of this unit is not bad at all.
At the same time Q1 Revenues at Rs 171 crore (Rs 157 crore) are 8 per cent higher than Q1 CY05. Tax paid is Rs 20 crore and after tax profits at Rs 26 crore (Rs 14.7 crore) are 76 per cent higher over Q1 CY05. This confirms my view that ACEL could report post tax profits of Rs 134 to Rs 153 crore in CY06, or an EPS of Rs 7 to Rs 8 per share.
Companies like ACC are fetching a PE of 45 on CY06 earnings forecast and a PE of 30 on CY 07 forecast earnings. A very conservative PE of 20 on CY 06 expected earnings gives ACEL a price target of Rs 140 to Rs 160.
More importantly, Holcim has announced a Rs 850 crore expansion at the Bhatpara Unit of ACEL, located in the State of Chattisgarh which would raise manufacturing capacity to nearly 3.5 mn tonnes per annum in about 2 years.
Thus ACEL is an emerging growth story and the stock needs to be picked up by investors with a 1-2 year investment view.



Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations, outlook etc are included in this update to help investors / analysts get a better comprehension of the Company's prospects and make informed investment decisions. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Investers are advised to consult their certified financial advisors before making any investments to meet their financial goals.


Rajiv Handa
011-91-11-2712 9653