Investor's Eye
[November 25, 2013] | | |
| Summary of Contents
SECTOR UPDATE Telecommunications EGoM favours higher auction prices; we prefer Bharti The event: The Empowered Group of Ministers (EGoM) has accepted the modified recommendation of the Telecom Regulatory Authority of India (TRAI; the recommendation with respect to pricing that had been altered by the Department of Telecommunications [DoT]). Our view -
Spectrum auction to be successful: We believe that at these base prices, the January 2014 auction would receive selective interest from the players and keep the pricing discipline intact (unlike in the case of the 3G auction) as telecom operators are in need of spectrum to provide quality service and reach out to the customers. Thus, if the players remain rational, the spectrum auction may sail through. -
Positive on sector; Bharti Airtel the top pick: The benign competitive environment, relatively soft regulatory hurdles and attractive valuation of telecom stocks make us continue with our positive stance on this sector. Our top pick in the sector is Bharti Airtel on which we have a price target of Rs395.
VIEWPOINT Ambuja Cements Deal a drag on Ambuja Cements; prefer UltraTech amoing large-caps Key points -
Ambuja-ACC deal gets favourable vote from minority shareholders: The Ambuja Cements-ACC deal has cleared the key hurdle as the minority shareholders (with a 68.5% stake in Ambuja Cements) have voted in favour of the deal, in spite of resistance from the domestic institutional investors (ie Life Insurance Corporation of India, General Insurance Corporation of India. The majority of the shareholders of Ambuja Cements has approved the merger of Holcim India with Ambuja Cements. The participation of the non-institutional investors in the vote was limited to 10.4% of the eligible votes (88.2% voted in favour of the deal). Institutional shareholders, hold a 39.8% stake in Ambuja Cements and 68% of them voted in favour of the deal. The management of Ambuja Cements expects the transaction to be completed by Q2CY2014, subject to necessary approvals. -
Deal negative for Ambuja's shareholders: The proposed deal structure between Ambuja Cements and ACC appears negative for the shareholders of Ambuja Cements as (a) it will result in a transfer of huge cash of Rs3,500 crore (without any meaningful benefit); (b) it is unlikely to result in any meaningful synergistic benefit as both the companies will continue to operate as separate entities; and (c) the valuation multiple is expected to shrink for Ambuja Cements because the cement capacity under ACC is likely to attract a holding company discount (of 20-30%). -
Likely to increase stake in ACC by 10%: In addition to the proposed transaction, the management of Ambuja Cements has indicated that it intends to increase its stake in ACC by 10% over the next 24 months following the completion of the current transaction. The acquisition of the additional stake will result in an outgo of about Rs3,000 crore. On the other hand, the company has also announced its capacity expansion plan to set up a 2.17-million tonne per annum (mtpa) clinkerisation capacity and a 4.5-mtpa grinding plant at a combined capital expenditure of Rs3,500 crore. Hence, looking at the huge cash outflow in the proposed transaction and the funding requirement in the ongoing capacity expansion, we believe the balance sheet and the cash flow of the company will have an adverse impact. -
View-Ambuja Cements to underperform; deal favourable for ACC: We believe the proposed restructuring is negative for Ambuja Cements in the near term as huge cash of Rs3,500 crore will be transferred from its balance sheet. Besides it is not likely to result in any meaningfull synergy. The valuation multiple is expected to shrink as the cement capacity under ACC is likely to attract a holding company discount. On the other hand, the Ambuja Cements management's plan to increase its stake in ACC by 10% augurs well for ACC as it will provide support to the latter's share price. However, the overhang remains in terms of a possibility of future corporate restructuring, which could be a key risk to the cash balance of ACC. Both the companies, Ambuja Cements and ACC, are not under our active coverage and we do not have any rating on the stocks. Among the large-cap cement stocks we prefer UltraTech Cement purely due to its relatively better valuation (as compared with ACC and Ambuja Cements). -
Deal structure: In a two-stage deal, Ambuja Cements will first acquire a 24% stake in Holcim India for a cash consideration of Rs3,500 crore; this will be followed by a stock merger between Holcim India and Ambuja Cements (this will cancel the 9.8% cross-holding of Holcim India in Ambuja Cements). The step will result in Ambuja Cements holding a 50.01% stake in ACC instead of Holcim India. In lieu of Holcim transferring its 100% stake in Holcim India to Ambuja Cements, Ambuja Cements will issue 58.4 crore shares to Holcim. Post-merger the stake of Holcim (the parent company) in Ambuja Cements will increase to 61.39%. | | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
Regards,
The Sharekhan Research Team | |
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