On late Wednesday evening, Swiss cement maker Holcim announced plans to restructure its Indian operations where in it will increase stake in Ambuja Cement to 61.39 percent from current stake of over 50 percent. Ambuja in turn will acquire Holcim's 50.01 percent stake in ACC.
Experts stressed that the merger, which allows Ambuja and ACC to continue its operations as separate entities, would be more beneficial if it merges the two entities into single brand.
"There are lots of synergies between the two companies and it will help their marketing much better to have these two forces combined," Sanjay Ladiwala President, Cement Stockists and Dealers Association of Mumbai said.
According to V Srinivasan, Cement Analyst at Angel Broking Ambuja, which will now hold majority stake in ACC may become the holding company of latter.
Ladiwala said that most likely Ambuja brand, which commands more premium could be declared as their flagship brand and ACC brand would be merged in to it. "Ambuja brand commands a substantial premium in most regions over ACC that ranges from about Rs 80-100 a tonne that multiplied by the total capacity which is close to about 50 million tonnes of the combined entity would be a sizeable premium," he added.
Both the experts believed that the merger would lead to some improvement in bottomline of these companies.
Below is the verbatim transcript of the discussion.
Q: What is the first take you are making with regards to this particular deal. Its been long awaited and how are you viewing it?
Ladiwala: Financials aside I mean whether the valuation is correct or not or what the valuation will be for either company. From the marketing perspective it would be interesting to see what they do as far as branding is concerned. Now that Ambuja will be the major company holding stake in ACC whether they maintain the Ambuja brand as their flagship brand and merge the ACC brand with it or still maintain the two separate brands because both the companies are going to be listed as different entities on the stock exchange is to be seen.
By all indications it seems that they might go in for the Ambuja brand and if that is the case then the Ambuja brand commands a substantial premium in most regions over ACC that ranges from about Rs 80-100 a tonne that multiplied by the total capacity which is close to about 50 million tonnes of the combined entity would be a sizeable premium. So, going forward it will be much better for the bottomline to merge the two entities into one brand but that is not yet clear. The fine print is yet to be seen. The second issue is whether the marketing divisions of both the companies also most of their purchases production has been merged but if the marketing is also merged it will bring about lot of synergies in both the markets rural and the urban market. So, it will be a very strong entity to contend with in the cement industry.
Q: One important question that infact the street was looking out from and I did hear various sources in the market that did say that maybe there was some kind of problem with regard to transferring of those limestone mines. Would that be an issue? Transferring, because now as things stand there would not be any transfer because both these entities would continue functioning as they were, so maybe that is why we are not getting an outright merger that did take place?
Ladiwala: I would hazard a guess and say. I don't think that was a problem in the initial stages because land mines generally are long-term leases, they are leased out. So, transfer of leases if the clause indicates that it can be transferred, I don't think there is any question of stamp duty or payment of tax on that. So, I don't think that was a major hurdle in any case to start with. So, I don't think that would be the main reason for maintaining the two separate entities.
Q: First thoughts, what do you think? Is it going to be favouring Ambuja-ACC? Which way is it pulling?
Srinivasan: Actually, I am yet to see the full contours of the deal. It was always expected that both the companies have to start aligning in somewhere because the major competitor UltraTech Cement was getting very aggressive and was going ahead of these two companies. So, this particular thing was expected. But for some reason now based on the information which is coming out it is like Ambuja will be the holding company of ACC going ahead.
Q: Credit Suisse had come out with a report a few weeks ago and they did state that synergies would result in maybe 10 percent of additional profits. Do you hold that thought?
Srinivasan: It should certainly result in some amount of profit growth for this company but it is very difficult to quantify it as of now. It should certainly lead to some improvement on the bottomline front.
Q: A quick word on the numbers that did come out, we did see that the topline come in around the Rs 2350, the margins were at 21 percent and the bottomline as well was more or less inline with streets estimate at Rs 324. Are you happy with these numbers?
Srinivasan: It has come in slightly below my estimates as such. However, overall we had estimated a weak quarter for all the cement companies in general so Ambuja has also come more or less on those lines only this quarter.
Q: What was the kind of capacity utilisations that ACC and Ambuja were functioning particularly in that Western region as well as North West region because there was some news that infact the smallest cement manufacturers were coming in and eating into their market share. Is there any truth behind that?
Ladiwala: Yes, there is a lot of new capacity which has come on in FY13 and there a lot of single unit manufacturers which has come on and generally yes, a lot of the bigger players have been losing a little bit of market share. So, the capacity utilisation has been falling and on an average it has gone down below 70 percent. I am talking about the entire country as a whole. But it is still much better in the Northern region and Ambuja is doing pretty well as far as the capacity utilisation is concerned. ACC being a little lower than what Ambuja does. So, in the North we have seen that the capacity utilisation is still good, but South was a cause for worry and that is hovering around 50-55 percent capacity utilisation, which is a little alarming.
Q: ACC does hold some kind of exposure to South India, but Ambuja doesn't really have much exposure to south India. So, on that note with Ambuja really becoming the parent and ACC still having some kind of exposure to South India do you think there is going to be any kind of pressure because demand is extremely weak as you did state?
Ladiwala: I don't think there is going to be further pressure. The deal itself is not going to lead to any further pressure. If at all their marketing strengths will improve because there are lot of synergies between the two companies and it will help their marketing much better to have these two forces combined. So, deal itself is not going to be negative as such the marketing is concerned or the revenues are concerned. On the whole demand has not been very good and not everybody is happy about that but that affects the entire industry not only Ambuja and ACC.
Q: Ladiwala was alluding to that in fact Ambuja does command some kind of premium in the markets of around Rs 80-100 per tonne. This would translate if you take around 50 million tonnes it would move to around or the topline increasing by around Rs 500 crore. Would you go with that figure that around Rs 500 crore is what given the premiums that Ambuja does command so could we see something like a Rs 400-500 crore bump up in this combined entity on the topline?
Srinivasan: I won't be able to comment right away on the numbers as such. However, it is true that Ambuja always commands a premium over ACC because of higher brands. However, right now I don't want to put any figures to it.
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