Ambuja Cements : Transcript of the Investor call

Ambuja Cements - Update on Penna Acquisition

Conference Call

June 14, 2024

MANAGEMENT

MR. AJAY KAPUR

CHIEF EXECUTIVE OFFICER

MR. VINOD BAHETY

CHIEF FINANCIAL OFFICER

MR. DEEPAK BALWANI - HEAD INVESTOR RELATIONS

MODERATOR

MR. RITESH SHAH - INVESTEC CAPITAL SERVICES

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Moderator:Ladies and gentlemen, good day and welcome to Ambuja Cements Conference Call hosted by Investec Capital Services. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Ritesh Shah from Investec Capital Services. Thank you and over to you, Mr. Shah.

Ritesh Shah:Thank you, Michelle. Good afternoon, everyone. On behalf of Investec Capital, we welcome you to Ambuja Cements Conference Call to provide an update on Penna acquisition. I'll now hand over the call to management of Ambuja Cements for their opening remarks, which will be followed by Q&A. Over to you, Deepak, and thank you.

Deepak Balwani:Thank you. Good afternoon, everyone. On behalf of Adani Cement, a very warm welcome to all of you. On this side, we have Mr. Ajay Kapur, Chief Executive Officer, and Mr. Vinod Bahety, Chief Financial Officer. Ambuja Cement, the cement and building material company of Adani Cement and part of the diversified Adani Group, has announced the signing of the binding agreement for the acquisition of Penna Cement Industries. I would like to invite Ajay ji for sharing his valuable insights on the acquisition. Over to you, Ajay ji.

Ajay Kapur:Thank you, Deepak. Good afternoon, ladies and gentlemen. I'm very happy to announce Ambuja's decision to acquire 100% shares of Penna Cements Limited and post that, Penna Cements becomes solely owned subsidiary of Ambuja. The transaction value, as you've already seen from our investor deck, is INR10,422 crores. It will be funded fully from our internal accruals. It includes 14 million tons of cement capacity, of which 10 is operational, 4 is under construction.

This will take Adani Cement's operational capacity to 89 million tons. The remaining 4 million tons under construction capacity will be added in the next 12 months. This is over and above the ongoing expansions which Adani, Ambuja, ACC Cements are already pursuing, which I have already briefed in the last call.

This transaction is also value accretive. On top of this cement capacity, we have five bulk cement terminals and one 25,500 tons self-discharging cement carrier, which will beautifully complement our coastal logistics strategy. The basic investment rationale is it helps Ambuja to increase its presence in South India while further expansion in Pan-India.

It fast-tracks the capacity which in any case we had planned through Greenfield expansions. With this, our South Indian market share will improve by 8% to 15% and our Pan-India market share will improve by 2%. The surplus clinker at the Jodhpur plant, which is under construction, will provide further potential of cement grinding of 3 million tons in our home markets of North Over and above 14 million tons. The surplus land and limestone reserves available at our integrated units from Penna acquisition will allow us to set up additional clinker capacity, de- bottlenecking some of the existing ones and also doing with small marginal improvements, more

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cost efficiency in the overall operations. Very interesting thing is it brings back Ambuja into Sri Lanka.

You might be aware many years back Ambuja had a bulk cement terminal in Kale in Sri Lanka, which later became part of the Holcim. With this, we also have an entry point back into Sri Lanka, where the group is also building a port and it helps us to start capturing market there. When we look at the capacity, when we acquired the companies in September 22, the capacity of ACC Ambuja together was 68 million tons.

with the Ametha brownfield expansion, with the Dahej, which is within the Adani Enterprises, 1 million ton grinding unit, with the acquisition of Asian Cement and Concrete and finally with My Home and Sanghi, we are currently already sitting at 79 million tons. With this 14, our capacity will go up to 93 million tons. As you all know, we have various projects under

commissioning. 20 million we have already announced in the last call, so that straightaway takes us to 113. The remaining 30 is also blueprint is ready, land has been acquired, mining is in place. So, we are well poised to hit our 140 million ton target, as we have been speaking in past.

The asset footprint of Penna beautifully fits into our southern strategy. It has units in AP, it has units in Telangana and it has a grinding unit at Krishnapatnam port, which enables the entire coastal strategy on the east coast. It also has a grinding unit in Maharashtra in Pune, which also fits in beautifully with our western market share strategy.

The new under construction plants, one in Jodhpur, it is a kiln of 3 million tons, which you know can produce cement of close to 5 million. And the Krishnapatnam grinding unit, which is currently 2 million, is under construction for another 2 million, work for which 50% is already completed, gives us a beautiful position of 4 million on a coast, which can enable us to go through the five bulk cement terminals I mentioned earlier. On this, we have a tremendous advantage on various costs.

I would now invite my colleague, Vinod Bahety, our CFO, to take you through the numbers and the business rationale and the deal details. Vinod, over to you.

Vinod Bahety:Thank you, Ajay ji. Good afternoon, ladies and gentlemen. I am so glad to engage with all of you on this another strategically important opportunity in terms of acquisition of Penna cement, which straightaway adds up 10 million tons of operating capacity, another under construction 4 million and 3 million potential with surplus clinker.

So, effectively, the 17 MTPA is what we get from this acquisition, which improves from my current base of 80 million, 20% capacity it jumps up to. Importantly, it takes my South India capacity to almost 20% and hence balances out my pan-India overall balancing of the capacity. As you know, we were at almost 10% of overall capacity in South India.

This brings us to almost 20%. Importantly, apart from all the points Ajayji has highlighted, it gives me an opportunity of earning a ROCE of almost 15%. Since you all know that we have been sitting on good cash and cash equivalent, it will be a good deployment of this amount and earning much more than 15% in terms of ROCE.

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	The entire acquisition will be funded through cash and cash equivalents. After all of this also,
	by end of this year, my estimate is that we will be holding almost INR10,000 plus crores of cash.
	In terms of the coastal shipping opportunity which Ajayji has highlighted, but most importantly,
	this is like a significant part of this acquisition, that it gives me the opportunity to complete
	Peninsula India to service at the most optimum logistics cost and on a most efficient ESG
	manner.
	We have already shared our investment rationale in the morning today and I am sure all of you
	would have gone through it. I won't take more time. Details are there and I will request
	straightaway to now come into question and answer. So, over to organiser.
Moderator:	Thank you very much, sir. We will now begin the question and answer session. The first question
	is from the line of Rajesh Ravi from HDFC Securities. Please go ahead.
Rajesh Ravi:	Hi, sir. Congrats on this large acquisition. So, first question is in terms of the expansion of the
	North plant. What is the current status? How much capex has already been incurred? And to
	complete the 2 million ton clinker and corresponding grinding and same for Krishnapatnam,
	how much capex would be required? And second, what sort of return ratios at various
	assumptions these assets can generate over the next two years?
Vinod Bahety:	I will take up that question. Rajesh, hi. So, in terms of the overall enterprise value, let me just
	put that number, say INR10,422-odd crores, out of which we will be releasing milestone
	payments of almost INR3,000 crores. This is the completion of Krishnapatnam as well as
	completion of the Marwar Jodhpur unit, so which would mean that the initial payment will be
	on an EV basis INR7,400-odd crores, and out of which if I overall remove the debt to another
	liability, say close to INR3,500 crores, the upfront equity comes to, say, close to, say, INR4,000-
	odd crores. So, in terms of the under-construction projects, we are going to release almost
	INR3,000 crores at different time intervals. This is the milestone to be achieved.
	Your second question was in terms of the overall return. I think you asked, and as I said in my
	initial remarks, we are targeting to achieve a ratio of almost 15%, and that we should start
	looking at from when we hit the capacity of, say, 80%, which we are targeting by, say, third
	year. So, one can safely assume that from '27, that is the return which we are looking at.
Ajay Kapur:	Just to add, I think you also asked the timeline. The timeline for the Rajasthan plant is about 12
	months from today and the timeline for Krishnapatnam would be slightly less than one year.
Vinod Bahety:	For Krishnapatnam, we are giving a timeline of say, nine months and Rajasthan, 12 months.
	Yes.
Rajesh Ravi:	So this Rajasthan expansion, this 10,000 crores EV, is this factoring in the capex which is
	required for the Rajasthan?
Vinod Bahety:	Yes. It does that. So, already, it is a work in progress. Already, they have incurred a certain
	expenditure, and then this amount which we are going to release on a milestone basis will be
	part of the overall enterprise value and which will be used for the completion.

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Rajesh Ravi:	Okay. So, this is not an incremental, is what I was understanding, because...
Ajay Kapur:	No. Total 10,400, to clarify for everybody's benefit, 10,442 is for entire 14 million tons cement
	capacity.
Vinod Bahety:	For Rajasthan, as well as Krishnapatnam, so all the under-completion projects will be covered
	as part of the 10,422 crores EV.
Rajesh Ravi:	Okay. That's nice to hear. And you mentioned that in the next 12 months, these projects, both
	the projects will be up and running. And lastly, in terms of when you're seeing 15% ROC at 85%
	utilisation, any thought on pricing? Because, see, what we understand, FY '24, these plants were
	operating at 25% utilisation. You would be ramping up because they were cash-curve and now
	you would be supplying that and hence, they would ramp up.
	And given that multiple capacities are coming up across South and East markets, how do we just
	look at pricing versus volume? Because if everyone would be looking at volume, the prices and
	that we are seeing in Q4 and Q1, you know, the pricing is taking a knock. And given that the
	prices don't recover, how confident are we that we would be looking at 1,200, 1,300 sort of
	EBITDA per ton and 1,500 guidance which you're looking at for the company level?
Ajay Kapur:	I can take that. Rajesh, basically, if you really look at South India, ACC is a very dominant brand
	from our portfolio there. We have a presence through Wadi and then we have presence in Tamil
	Nadu through Madukkarai. We have presence through two grinding units in Karnataka. We have
	presence through Ambuja in Mangalore and Cochin through our two bulk terminals. And now,
	recently, we have acquired a Tuticorin grinding unit from My Home.
	So now, basically, if you see, ACC is undersupplied in the market, and we have actually been
	losing market share. When I look at Penna, in 2022, Penna itself did about 6.5 million, 6.6
	million. So that plus what we are doing, and we have taken a very considered ramp-up plan.
	First of all, undersupplied ACC. Secondly, undersupplied Ambuja also over the years, because
	we had run out of capacity in Gujarat. Now we are ramping it up.
	So what we feel is, from volume side, we should not have a problem. We also look at the cap
	utilization of the leading companies in South, and we find some of the leaders are operating
	today at 78%. So I think if you take an 80% target back to within a 36-month period, it's a very
	fair assumption we have taken. Mind you, there will be a substantial growth in large parts of the
	country, especially with the new regime in place in AP. I believe there should be a lot of
	development work. So some demand will happen there.
	The new capacity creation has already slowed down in South. It's more ramping up of the old
	capacity. And finally an M&A of this nature helps the industry, because rather than putting a
	new greenfield, we have acquired an existing asset, which I believe is a win-win for us as well
	as for the cement business.
Vinod Bahety:	And can I just add, Ajayji, as we decipher these South markets, almost 200 million tons of
	capacity over 35 players, this acquisition actually helps in terms of consolidation. So as we see
	right now, the top five players, they have almost say 45% capacity share. Now, while we know
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	that Kesoram is getting consolidated with UltraTech and now Penna with us and so this will
	actually improve the share of the top five players to almost say 55%. And that will actually help
	in maturing the overall industry for the Southern markets.
Moderator:	Thank you. The next question is from the line of Kamlesh Jain from Lotus Asset Managers.
	Please go ahead.
Kamlesh Jain:	Yeah, thanks for the opportunity and congratulations on the acquisition. So just one question on
	the part of this clinker. So this 10,422 crores includes 3 million ton clinker capacity as well.
Vinod Bahety:	That is true.
Kamlesh Jain:	And so what is the timeline for that and the ordering? Has it been ordered or you are going to
	order it?
Ajay Kapur:	Kamlesh, I think I just answered in the previous question for sake of not repeating it. But still
	for you, I'm repeating. Both the projects are expected to be completed in one year. So its work
	is already going on at site. 60% of the civil structures are already standing and it's at an advanced
	stage.
Kamlesh Jain:	So when you say the 2 million ton grinding unit or the timeline of 12 months for the Rajasthan
	unit, so that 12 month timeline includes clinker as well?
Ajay Kapur:	Yes.
Vinod Bahety:	Kamlesh, it is an integrated unit. So therefore, yes, it will be combined together 12 months.
Kamlesh Jain:	And sir lastly not related to the acquisition, but I believe there has been one tender or one
	particular arrangement which company is looking for that we are going to outsource the cement
	production at the plants. So can you throw some light on that part?
Vinod Bahety:	No, my request, Kamlesh, this is specifically for the acquisition call. So my request is let's right
	now focus and let's give the opportunity for the other questions also to come in. We will have
	another day to answer this Kamlesh.
Ajay Kapur:	And we can engage with you separately.
Kamlesh Jain:	Thanks sir. Thanks a lot.
Moderator:	Thank you. The next question is from the line of Navin Sahadeo from ICICI Securities. Please
	go ahead.
Navin Sahadeo:	So thank you for the opportunity and congrats on the great deal. Two questions. One is with this
	acquisition now giving us a major inroad into South and also in the North should one make or
	believe that the organic expansion that we were trying, in fact, in the previous call after Q4, you
	had said that in 3 months, 4 months we were looking to order three large kilns of 4 MTPA each
	in North, South and one in West. So with this acquisition does that organic expansion take a
	little bit of a breather or a backseat? That's my question one?
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Ajay Kapur:	So very simple. Our target is to put 140 million tons by March of 2028 and every time when this
	question came and a question was asked would we be open to organic, inorganic a mix of both
	we always said we look at a good opportunity. This opportunity helps us in perhaps slowing
	down some of our Greenfield projects which we are planning to bring in South. I did mention
	about that.
	However, we have markets in Central, markets in East, markets in North. North also is not one
	market. There is one market of Rajasthan, Haryana, Delhi then there is one market of Punjab,
	Himachal, Jammu and adjoining Western UP. So those markets, I believe will still need an
	expansion and we'll continue with some of the projects which we are doing within the overall
	capital allocation to achieve 140 million tons and also making sure that most of our expansions
	are fully funded through our internal resources.
Vinod Bahety:	Navin just also add, end of this year we should be hitting almost like operating capacity of say,
	96 million tons and by FY26, I should be giving good news of 110 million tons. So all our plans
	are very much on roll.
Navin Sahadeo:	Understood. That's helpful. My second question was about the potential to expand further on
	Penna. And I know South would have enough and more limestone, but can you just give more
	details as to what kind of limestone availability is there in North to pursue another line of
	expansion there because that I would like to believe would come at a much lower cost. And I
	believe this is a very good location from a strategic point of view also. So how should one look
	at further expansions in North from Penna?
Ajay Kapur:	So Navin for Penna in North as you can see the valuation we are already on a very good attractive
	valuation because this is a blended valuation which we are paying for the entire 14 million which
	includes North and that's why this deal looks very attractive to us. As you are aware, we already
	have substantial limestone reserves at our Marwar Mundwa position in Rajasthan and where we
	already have a latest kiln in put up only a few years back.
	So I think in future we do have a lot of limestone reserves. We recently won another auction in
	Jodhpur in the last round of auctions. I think beyond that at this moment it will be difficult for
	me to comment whether we will expand at this current location, but I can only tell you that this
	plant itself is a new 3 million ton plus kiln and we already have enough limestone to expand at
	Marwar Mundwa multiple kilns over there.
Navin Sahadeo:	Helpful. Thank you sir.
Moderator:	Thank you. The next question is from the line of Amit Murarka from Axis Capital. Please go
	ahead.
Amit Murarka:	Hi, congratulations and thanks for the opportunity. So in North this 3 million ton grinding that
	you will be setting up in the future, I believe the land is not acquired and is not part of the deal.
	That is one and something I wanted to clarify?
Ajay Kapur:	So Amit North we are having a clinker line of 3 million. At the same location there will be about
	2 million of grinding part of the deal. In addition, we already have multiple locations in north
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	because Ambuja ACC has a good footprint. And as part of our future expansion, you already
	know we are putting up a grinding unit in Hoshiarpur. We are putting up an expansion in
	Bhatinda and besides we have already acquired a few land parcels for grinding units. So I think
	it should not be a very difficult thing for us. It will be a very smooth plug and play for us.
Vinod Bahety	Amit just to highlight that plant land is already there and the land for the limestone whatever the
	balance land and also for the railway line and all, will be the responsibility of the seller and
	which is very much part and parcel of the entire EV. So that is a complete package which they
	have to deliver.
Amit Murarka:	Sure. And in case there is a delay, so does that 3,000 I think you mentioned INR3,000 crores?
Vinod Bahety	Those adequate mechanisms are there let us be assured. We have put a proper structure there.
Amit Murarka:	Yes okay. And also like as this will be under a wholly owned subsidiary so I believe there will
	be MSA again over here. And in this belt at least I think Ambuja doesn't sell much. So I mean
	is it fair to say that you may think of doing more sales under ACC brand which is probably a
	more recognized brand in that belt?
Ajay Kapur:	So it's an opportunity for us to develop a market from ground zero. Yes, you're right. In some
	markets ACC has a very strong brand, but Ambuja traditionally also was present earlier which
	later on because it ran out of capacity it had very good position in Andhra especially the Adilabad
	right up to Nalgonda cluster. So I think we'll use both the brands Ambuja, ACC in time to come
	and yes it will be 100% subsidiary of Ambuja.
Vinod Bahety	Yes. And Amit we have a very mature MSA and. those MSAs will be followed here as well.
Amit Murarka:	No, I was just trying to figure out if ACC can also benefit from this deal because I mean, they
	have a good presence in that belt?
Vinod Bahety	Which Ajay ji already answered to you.
Amit Murarka:	And lastly the Krishnapatnam 2 million ton that will come up. My understanding is that you will
	be short of clinker for that because the clinker is 7.3 million ton and as we know that belt, I
	mean, it's a OPC belt 1.3x cement clinker. So as of now I believe you can do 9.5 million ton, 10
	million ton max over there. So is there any plan to kind of add any further clinker line either in
	that specific plant or any other line over there in other plants that you have?
Ajay Kapur:	So Amit we already have as we mentioned also in the docket we have uploaded. We have
	substantial limestone reserves at most of the sites of Penna. They do allow us to debottleneck
	and also put a new line. In addition, Ambuja and ACC both have substantial limestone reserves
	both in Andhra and in Telangana and these reserves are free auction era. So it certainly allows
	us to put up another line in, for example, Nadikudi for Ambuja and also in Kadapa for ACC.
Vinod Bahety	And Ajay ji just also to add, adequate lands are also surplus lands are available in Penna
	Cement's existing assets which will facilitate the expansions.
Amit Murarka:	Okay got it. Thank you very much.
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Moderator:	Thank you. The next question is from the line of Hrishikesh Bhagat from Kotak AMC. Please
	go ahead.
Hrishikesh Bhagat:	Hi, good afternoon. My question is related to Slide 7 where you have provided a logistics
	roadmap in terms of, so is it fair to -- if my understanding is right that potentially Sanghi clinker
	could also come into the AP market through your shipping route? Is that a fair understanding
	based on this map or do you think potentially only these assets clinker will be used for the
	grinding unit?
Ajay Kapur:	So Hrishikesh very good question. See before we had this asset, Sanghi and Ambujanagar were
	two sources of clinker for us for the Western Corridor. Today, we are evaluating the cost benefit
	of Krishnapatnam right up to Cochin. I believe beyond Cochin upwards, I think Sanghi would
	be more advantageous and also cost effective, but I think up to Cochin, Krishnapatnam and also
	into Sri Lanka, Krishnapatnam will be more cost beneficial.
Hrishikesh Bhagat:	So with Sanghi also we have reasonable clinker on the Coastal side. So even that will come into
	the AP market that's what the question was potentially?
Ajay Kapur:	I think Sanghi will more focus in Gujarat. It will focus in Maharashtra. It will focus in up to
	Mangalore and I think with proper shipping we will see if we have to bring up to Tuticorin even
	that might work out for us.
Hrishikesh Bhagat:	Okay. That answers my question.
Moderator:	Thank you. The next question is from the line of Prateek Kumar from Jefferies. Please go ahead.
Prateek Kumar:	Yes. Hi, Good afternoon sir and congratulations for the deal. My first question is on the product
	mix of Penna Cement how is that seen and how do you think to evolve that product mix in the
	region by substituting your brand or otherwise?
Ajay Kapur:	So Prateek we have a very good playbook for our brands, for Ambuja and ACC. We have
	typically a base brand and we have two premium brands for each of the company which is the
	playbook we have for Pan India. In addition, for B2B segments, we have our power brands, OPC
	and also blended. So we basically do the same playbook.
	The good news is Penna at all its locations has multi chamber silos which I believe will help us
	in going ahead with our playbook of premium brands and base brands. The quality of clinker
	what I've seen is very good. It allows us to produce all kinds of cements that we are already
	playing with. So I think more or less we will follow what ACC strategy is in Karnataka, the base
	brand and the premium brand and our OPC and Penna allows us all this.
Prateek Kumar:	And secondly on efficiency of the plant and legacy of the plant. So are these some of these plants
	are like too old or like too inefficient or are these like up to speed in terms of efficiency of
	Ambuja Cement?
Ajay Kapur	So I'll tell you all the -- there's only one plant which was built somewhere in 94. Other than that
	most of the plants have been built. If you see we have loaded in Slide number 5 the Talaricheruvu
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plant was 1.3 was built I think a little earlier, but most of the other plants are clearly of a recent era.

All plants have their own railway siding, very good limestone reserves, very good equipment, very well maintained plant and all the bulk terminals are very efficient, fully automated both packing machines. So I think the asset class is very good, I would say and also the maintenance is of the top order and they have their own captive power plants, waste heat recoveries.

I think it's only one plant Talaricheruvu where there is no railway siding where the plant is on a hill. Other than that, all plants are very well connected with all the modern infrastructures. That's number one. Having said that, there are opportunities available for us with a little bit of an investment to, for example, putting some coolers, replacing coolers maybe adding a little bit extra waste heat capacity in some places. I think at AFR Penna has perhaps not moved fast.

With our experience where some of our plants are already operating at about 25%, 30% AFR and a full-fledged team in place, we should immediately with some fast investments increase the AFR. On top we already have a great solar strategy. As you know AAA is in the process of putting 1000 megawatts of solar and wind.

In Andhra, there is a lot of opportunity to put behind the meter assets as well. So once we integrate our RE strategy, AFR strategy on top, we integrate the Adani Group's ecosystem of fully taking advantage of synergies from the group whether it is fly ash, whether it is bulk cement wagons for bringing fly ash, the coal and fuel strategy.

I think each of these should give us an upside of about don't take me wrong because it's early days for us, but I would say about INR300 per ton cost efficiency is something very doable. And on the pricing side as you know Ambuja ACC are A category price players. So there is always a INR5 to INR10 upside on the pricing.

So if I put INR10 on pricing and INR300 on cost we are talking about INR500 EBITDA kick up from the current levels and then productivity going up over a period of next 2 years to 80% plus.

Vinod Bahety:And I will just also add in good times this company has been earning INR600 to INR700 EBITDA per ton. So if you just add this mark-up, almost then we are like between INR1000 to INR1250 down the line when we do those efficiency investments.

Prateek Kumar:INR1000, INR1250 is like sort of part of INR1500 console companies EBITDA per ton or like this number will also go to INR1500 or how is it?

Ajay Kapur:No, this number will go to INR1500, INR1000. See what we are doing at Ambuja, ACC level we are running on a cost on margin optimization program of INR550 which we had also announced in the last earnings call. Once Penna is part of our ecosystem and blends into the Ambuja, ACC ecosystem the same INR550 margin expansion plan will also work here of which I already told you about 500 comes from price and cost.

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