HDFC Securities - Cement - Is Holcim's green focus reason for its India-exit stories?

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities and Mr. Keshav Lahoti, Institutional Research Analyst, HDFC Securities

Media reports are ablaze with talks of a potential exit by Holcim from Indian markets. Neither Holcim nor its Indian subsidiaries Ambuja and ACC have offered any comments on the same so far. Our analysis suggests India remains a major market for Holcim and its Indian cement operations lead, with a lower carbon footprint. However, Holcim recently accelerated focus to expand the revenue share of green and sustainable solutions & products (S&P), at the expense of its cement business. Thus, it has been selling off cement assets in various geographies and acquiring assets in the US and Europe to augment its S&P revenue. This adds credence to the market chatter of its India exit, as that can fast-track Holcim's 2025 goals. We believe the mammoth investment (of ~USD 10.5bn) required by any potential buyer can delay the deal execution and slow down the expansion pipeline of ACC and Ambuja over next 2-3 years, thereby benefitting the industry's pricing power. We currently have a BUY on ACC (TP INR 2,570/sh) and an ADD on Ambuja (TP INR 370/sh).

India is a key market for Holcim: The consolidated revenues/EBITDA of Ambuja and ACC account for 13/12% of Holcim's global operations and ~60/46% of Holcim's presence in the Asia-Pac region. The Indian operations also lead on its leaner carbon footprint: ACC/Ambuja reported 13/5% lower specific CO2 emissions in CY21, compared to Holcim.

Holcim targeting to reduce cement portfolio in favour of green products by CY25: The global cement major expects to reduce revenue share of cement from 60% in CY20 to ~35% in CY25. In this period, it expects greener S&P share in revenue to surge to 30%, vs 8% in CY20. In the past 12 months, Holcim has made multiple acquisitions in the US and Europe (in S&P). It has also divested its cement operations in Brazil, North Ireland, East Africa, and Indian Ocean regions. Given that India has a large share in cement, exiting India can accelerate Holcim's 2025 target, in our view. With potential sales proceed of ~CHF 6bn (pre-tax, at CMP), the sale of Indian assets can fast-track Holcim's S&P expansion and also keep its leverage under check.

This could mean a mega-deal moment for the Indian cement industry: As both Ambuja and ACC are listed entities, the buy-outs would also entail mandatory open offers in both the companies, inflating the acquisition investment. At CMP, this would lead to a mammoth acquisition investment of ~INR 780bn (USD 10.5bn), limiting the number of bids available to Holcim. It would also become the largest deal in the Indian cement industry.

The deal progress can derail ACC/Ambuja's Capex plans: Given the deal size and required approvals, it could slow down the Capex momentum at both ACC and Ambuja (compared to their recent aggressive stance). This is good news for the industry as any slowdown in expansion will narrow the demand-supply imbalance and aid pricing power.

Current view on Ambuja, ACC: We currently have a BUY recommendation on ACC, with a TP of INR 2,570/sh (12x its Mar-24E consolidated EBITDA). We have an ADD rating on Ambuja, with an SOTP based TP of INR 370/sh (valuing its cement business at 14x its Mar-24E standalone EBITDA and its 50% holding in ACC at a 30% discount to our target market cap).

Source : Equity Bulls

Keywords

Cement Holcim IndiaExit HDFCSecurities