Is Ambuja overpaying for Orient Cement?

As consolidation gains pace across the cement sector, Ambuja is expanding capacity despite lofty valuations and soft earnings weighing on the industry’s short-term outlook.

This acquisition will add 8.5 million tonnes of operational capacity across Telangana, Karnataka, and Maharashtra to Ambuja’s portfolio. Additionally, Orient’s limestone mining lease in Chittorgarh, Rajasthan, offers potential for an additional 6 million tonnes of capacity in northern India.

Race for southern market share

Ambuja’s move is part of a broader trend where cement companies are positioning themselves to benefit from infrastructure-led demand growth in southern India. 

UltraTech Cement and Ambuja have been particularly active, with the latter acquiring Penna Cement in June for $125 per tonne. Penna’s 10 million tonnes of operational capacity and ₹10,422 crore enterprise value reflect the strategic importance of southern-focused assets, where Andhra Pradesh’s capital Amravati is expected to spur cement consumption.

The Union Budget 2024 further boosts this narrative with an allocation of ₹15,000 crore for Amravati’s development and investments in backward districts across Andhra Pradesh. This wave of regional development has cement companies scrambling to secure capacity to meet the expected demand boom.

Fair valuation or overreach?

At $114 per tonne, Ambuja’s Orient acquisition aligns with market trends. In July, UltraTech acquired 32.7% of India Cements for ₹390 per share, valuing it at $111 per tonne. 

Despite concerns about overpaying, Ambuja’s financial muscle—reflected in cash reserves of ₹18,299 crore at the end of June—suggests it is well-positioned for strategic acquisitions.

Ambuja’s latest acquisition also advances its target of reaching 100 million tonnes of capacity by FY25, building on the 89 million tonnes it held through subsidiaries ACC, Penna Cement, and Sanghi Industries at the end of June.

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Meanwhile, UltraTech’s capacity hit 150.7 million tonnes in October, underscoring the intensifying race between India’s cement giants.

Despite the strategic potential, Ambuja’s stock fell 2.4% to ₹558 on Tuesday, and Orient Cement shares dropped 2.5% to ₹343.4, amid broader market weakness. However, Ambuja’s long-term momentum has been solid, with its stock gaining 35% over the past year, outpacing the 24% rise in the benchmark Sensex.

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Cement companies are counting on the ₹11.11 trillion capital expenditure announced in the July budget to boost infrastructure, which could drive cement demand and underpin long-term growth.

Earnings pressure

Recent earnings, however, have been disappointing.

UltraTech Cement reported a 35% year-on-year (YoY) drop in operating profit to ₹796.9 crore for the September ended quarter, with revenue down 4% YoY to ₹14,905 crore. Realizations also dipped 8.4% on year to ₹4,901 per tonne, reflecting weaker pricing power.

The high valuations of cement stocks add another layer of concern. Ambuja trades at over 50 times FY25 estimated earnings, while UltraTech’s P/E ratio exceeds 60. These multiples suggest that cement stocks are expensive in the short term, especially given the sector’s lacklustre earnings performance.

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While high valuations may deter some investors, the consolidation within the sector and ongoing government-driven infrastructure projects present a compelling long-term investment story. Cement companies like Ambuja and UltraTech are positioning themselves for the next growth wave, hoping that India’s infrastructure expansion will fuel sustained demand.

Note: This article is based on data from press releases, company websites, and mainstream media sources.

Amriteshwar Mathur has over 20 years of experience in financial journalism.

Disclosure: The author has been a shareholder in Ambuja Cement for nearly two decades.