Sanghi Industries settles down, analysts peg falls on minority shareholder concern over Ambuja Cement supply deal

Concern among minority shareholders about the Master Supply and Service Agreement proposed by Ambuja Cements is the main reason for the fall in share prices. They believe Sanghi Industries’ control on profitability will be limited under the agreement.

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Shares of Sanghi Industries traded flat on January 19 after falling for three consecutive days on concerns that the Master Supply and Service Agreement proposed by Ambuja Cement will limit its profit potential. On January 19, Sanghi Industries opened for trading at Rs 121 and was trading at Rs 120.8 at close on the NSE.

Adani Group-led Ambuja Cements and ACC have also announced an open offer to acquire a 26 percent additional stake in Sanghi Industries.

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On the open offer, analysts suggest a wait-and-watch approach as currently only estimates are available on what the impact on the margin could be and feel that it would be difficult to ascertain whether even a small increase in the EBITDA (earnings before interest, tax, depreciation and amortisation) margin (once the MSA comes into effect), would impact the share price in the long run. Nirvi Ashar, Fundamental Analyst, Religare Broking. “I feel that one should let the issue get over and then the investors can take a call and sell the shares in the open market itself, if they are looking to sell, based on the outcome of the meeting.”

Also read: Sanghi Industries crashes 10% over profitability concerns in Ambuja Cement deal

Ambuja Cements and ACC already own 56.74 percent stake in Sanghi.

Minority shareholder concern

According to analysts, at the time of the deal, the market expectation was that, by operating under the Ambuja brand, Sanghi Industries would be able to generate an EBITDA of Rs 600-700 crore within a year. But with the cap, the turnover would be around Rs 2,000 crore from Rs 947 crore in FY2023 and EBITDA would touch around Rs 180 crore from Rs -14 crore. That would mean an EBITDA margin of 9 percent. Currently, EBITDA margin of the listed players range from 9 to 27 percent. The most profitable player, Shree Cement, commands an EBITDA of 17 percent while the least profitable player makes less than -1% based on FY23 financials. Ambuja Cement clocked an EBITDA margin of 13 percent for the same period.

The concern for the shareholders, analysts say, is that now Sanghi Industries’ control on its profitability will be limited. “In case there is a point where the market is seeing good demand for cement companies, (which has actually happened over the last couple of quarters for larger players), Sanghi will not be able to expand its margins and profitability,” Nirav Karkera, Head of Research, Fisdom, explains.

This view is seconded by Sunny Agrawal, Head of Fundamental Research, SBI Securities. “Although this will significantly improve capacity utilisation from the current 25 percent to a planned 80 percent, the EBITDA margin will be capped at 10 percent, around Rs 350 per tonne, which is lower than the industry standard for other cement businesses,” he explains. “The current industry standard is around Rs 800-1,000 per tonne for a well-managed cement business,” Agrawal explains.

In FY23, Sanghi clocked sales of Rs 947.81 crore, and recorded a negative EBITDA of Rs -14 crore ( -1% margin). It had long-term debt of Rs 1,351 crore and a short-term debt of Rs 180 crore as of FY23.

In August 2023, Adani-group company Ambuja Cements acquired Sanghi Industries in an all-cash deal at a Rs 5,000 crore valuation. At that time, it had acquired 55.41 percent of the overall shareholding. Ambuja Cements has said that it expects the acquisition of Sanghi Industries to enable it to increase Sanghi Industries’ aggregate cement production capacity by 9 percent to 73.6 million tonnes per annum. In December 2023, Ambuja Cement acquired an additional 2.23 percent stake, bringing up the total stake to 56.74 percent. Initially, Ambuja Cements had announced the current open offer at Rs 114.2 per share. This was ultimately changed to Rs 121.90 per share for in December 2023.

Also read: Cement makers see raise in target prices, upgrades as Morgan predicts demand boom

Two days after the open-offer announcement, on January 14, Ambuja Cements said in a notice to stock exchanges, that it has proposed to sign an MSA under which it would provide a long-term unsecured loan (Inter-Corporate Deposit) for additional financial assistance of up to Rs 500 crore in one or more tranches to help Sanghi Industries meet working capital requirements, and for plant balancing and refurbishment, IT upgradation, ESG initiatives and other general corporate purposes. Ambuja Cements has previously given the company an ICD of Rs 2,110 crore at an 8 percent interest rate to Sanghi Industries in order to repay existing secured debts. As part of the MSA, Ambuja Cements and ACC will also bulk-purchase clinker and cement produced by Sanghi at a fixed mark-up of 10 percent on the cost of production. This will be sold under the Ambuja Cements/ACC brand names.

Justifying this rationale, Ambuja Cements said that it will help in improving the overall profitability of the company from negative EBITDA to a substantially positive EBITDA, going forward. “It will also ensure meeting all the financing requirements of the company, apart from investments required for improving plant efficiency, capacity and evacuation infrastructure,” the presentation added.

Shriram Subramaniam, Founder and Managing Director of InGovern said one may need to wait and watch how things proceed as both Ambuja Cements and Sanghi Industries were listed companies with different minority shareholders and there may be pros and cons for both. Overall, this is “a positive move as Ambuja Cements is supporting Sanghi Industries, which has been loss-making for some time,” he said.

Ambuja Cements, he explains, has come in and provided Sanghi Industries the support when it is needed.

Ambuja Cements (Adani Cements) will hold a board meeting on February 8 to vote on the contents of the MSA signed between Sanghi Industries and Ambuja Cements.

The open offer for Sanghi Industries will close on January 29.

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