Ambuja Cement - a classic example of Value trap becoming a Value bet through Special Situation.

Sep 16, 2022 12:36 am

Good morning my dear readers,

Someone wise once said - "Work begins on Monday but LIFE starts on a Friday".


Remember last year, we joked about Tejas Networks becoming 'Tata Networks' post the takeover.

This time, can we jokingly call Ambuja Cement - 'Adani Cement'?

Transformation = Better earnings visibility = Rerating = Alpha = I Happy.


Nothing can better describe what promoter change does to the DNA of a business than the above GIF.


The Ambuja Cement case study - A classic special situation example.

From 2017 to 2022, the Ambuja Cement stock hovered between 260-290. (Nearly 6 years of a 'nothing performance')

Holcim owned Ambuja and then merged with Lafarge but the problem was that they wanted to move into 'Green Assets'.

Hence, they stopped expanding capacity at Ambuja. The last 5 years revenue growth stagnated to a mere 5% CAGR.

And therefore, a stock which used to have an EV/EBITDA of 14x in 2017 started started 'de-rating' to a valuation of a mere 7.1x EV/EBITDA by 2022.


And this is why I say "Normal Value Investing is DEAD".

(Read below, carefully).

'Normal Value folks' holding Ambuja cement because of its 'cheapness' were basically buying into a 'Value Trap' because the promoter of the business was busy sleeping since 5+ years.

Value investing, the old fashioned way, im sorry to say - is finished.


The game of investing is in 'Re-Rating' and that largely happens when Growth suddenly comes back or Corporate Governance suddenly improves and that generally only happens during a special situation event.

Buying a half dead business in the name of 'Sasta Valuation' is like drinking Coffee without Coffee inside.

(Basically you are just drinking milk + sugar).


Anyway, so now Mr Adani has won the bid for Ambuja cement and has publicly stated that he will double capacity in 4 years implying a 19% growth CAGR again.

So now, we have growth trigger which led to the re-rating trigger and that led to a cool +50% upmove in the stock within 3 months of the Open Offer announcement.

(The midcap index is +17% in the same period. #Outperformance).


Conclusion: Really, you want me to still give you a conclusion?

Ok, just because we are friends, I will.

Basically, Special Situation investing is Value Investing, but with a Trigger.

Special Situation investing gives our portfolio '2 factors' compared to just '1 factor' in something like a Coffee Can investing.

*In Special Situations, your stock is likely to have '2 factors': 15% earnings growth + 'Re-Rating' as the undervaluation goes away over time.

(2 factors = Earnings growth + Rerating).

*In Coffee Can investing, your stock is definitely going to have just '1 factor' - which is 15% earnings growth. There is just no way that something like Pidilite, Asian Paints, Nestle or Abbott can 're-rate' and trade at higher valuations over time. They could infact, de-rate.

(1 factor, just earnings growth here)

Ever wonder why the average fund in India has just 12-13% CAGR? They all own the same set of big stocks at high valuations.


By the way, we had originally written about Ambuja Cement back in May 2022.

If you would like, you can read our short 'LIVE' note in the below mentioned link:


Your Negen Startup Fund update:

Blue Tokai posted all time high revenue in August 2022.

Remember to gift your loved ones Blue Tokai gift hampers this Diwali =)


That is all from me today my friends.

I wonder what will I watch on OTT today.

Cobra Kai (Yes, I am a Karate Kid fan), Lord of the Rings or House of Dragons?


Take care, have fun. A lot more to discuss next week.

Ps - Negen Capital PMS is a continuous cycle of finding the next Special Situation. If this style of investing intrigues you, call us, we will explain our PMS to you. for more details or just reply to this email.

Sneaky me (-_-)

My best,

Neil Bahal

Founder & CEO

Negen Capital PMS

Negen Capital Startup AIF

Disclaimer - Negen Capital PMS owns Ambuja Cement and this is not investment advice. This newsletter is only for educational purposes on the topic of Special Situations. We are not paid by anyone to write this newsletter. Kindly consult with your financial advisor before acting on the contents of this Newsletter. Investing in stock market can result in losses.