Deal makes Guj Ambuja most valuable cement co

HOLCIM'S acquisition of a controlling stake in Gujarat Ambuja Cements has resulted in the highest-ever valuation for an Indian cement company. In the cement industry, enterprise value per ton is typically used as the valuation metric. The current deal, struck at Rs 90 per share (excluding the non-compete fee of Rs 15 per share paid to the promoters), translates to an enterprise value for Gujarat Ambuja of $198 per ton. This is by far the highest pricing ever received, dwarfing the previous deal, Holcim-ACC, which was at roughly $100 per ton. In the past, most of the local cement deals were in the range of $80-$120 per ton. Says an industry source, "Globally one has heard of $140-$150 per ton but close to $200 per ton is unheard of." What is interesting is that cement players are willing to pay a hefty premium to buy an existing capacity over setting up a greenfield project.
Enterprise value (EV) of a company is measured by adding market capitalisation and debt. EV divided by the existing capacity gives the EV per ton. EV per ton is considered a better measure by analysts than just market capitalisation since it also accounts for the firm's debt that needs to be paid by the buyer while taking over a company.
If one were to look at the major deals in the last decade, the $100-plus deals included Holcim-ACC ('04) deal, Lafarge-Raymond ('00) and Gujarat Ambuja-DLF(1999). Out of the lot, Lafarge-Raymond commanded the highest price of $119 per ton. Even when adjusted for inflation, these deals come nowhere close to the Holcim-Gujarat Ambuja deal in real terms. EV per ton for major players today range anywhere from $ 98-$198. Gujarat Ambuja is quoting at $198, ACC at $38, Madras Cement at $116, India Cements at $105, Grasim's cement business at around $100 and Ultratech at $98. Top listed companies are quoting anywhere from 1 to 2 times the replacement cost. As per industry estimates, it roughly takes $95 to set up an 1 ton cement capacity plant in India.
Gujarat Ambuja has always commanded a premium over the other players in the market. The reason — higher profit margins emanating from greater cost control measures. Its captive power plant, for instance, generates power at a substantially lower cost than the national grid. It also sources cheaper inputs from South Africa and the Middle East.
Profitability margins of the cement companies could be measured from its EBITDA (earnings before interest, tax, depreciation and amortisation) per ton. While Gujarat Ambuja had an EBITDA per ton of $12, it was $11.5 for ACC and $9 for Shree Cement. It was lower for companies such as Ultratech Cement and Madras Cement with respective EBITDA per ton of $5.4 and $7.2.
Gujarat Ambuja Cements has reported a 34% increase in net profit at Rs 122 crore for the second quarter ended December 31, '05 as against Rs 90 crore in the same period last year. Turnover during the quarter increased 9% at Rs 797.6 crore. The company sold 3.42m tonnes of cement in the second quarter as against 3.34m tonnes last year.
 
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