Synergy benefits can drive up to 14% earnings per share upgrade for Ambuja Cements Ltd. The proposed restructuring is value neutral for the company. Cash usage limits equity dilution and offers better upside once benefits of synergies start percolating.
Synergies of R780-900 crore (8-10% cost savings) are likely to support profitability (4-14% EPS accretion in CY14/CY15) and dilute our concerns over gradual decline in subsidy benefits after CY15. We expect synergies of 20/50% in CY14/CY15.
Balance sheet is likely to remain self-sustaining, despite usage of cash for stake purchase. We expect net cash to reduce from approximately R3,500 crore in CY14 pre-deal (standalone) to approximately R2,700 crore in CY14 post-deal (consolidated).
While investors are concerned about hold-co discount for Ambuja’s stake in ACC, we believe ACC’s higher payout and operating control by Ambuja may offset concerns pertaining to normal hold-co structure. We are yet to factor in this deal and resultant synergies. However, based on our preliminary estimates, Ambuja trades at 8.9-times CY14 estimated EV/Ebitda and EV/tonne of $111. We remain ‘neutral’, with a revised target price of approximately R188.
Holcim’s restructuring transaction proposes at-par valuation for Ambuja Cements. Cash usage in deal structure limits equity dilution. Compared to an all-share deal, it is EPS decretive immediately, but offers better upside, once benefits of synergies and up-cycle start percolating. We expect Ambuja’s balance sheet to remain self-sustaining, despite a R3,500-billion cash outgo, as a net debt situation will arise only if it goes for additional 10% stake purchase in ACC.