Unjustified premium
Too much premium for quality
Ambuja Cement has generated the cement sector’s leading ROCE
over the previous cycle, which has seen the company enjoy a
valuation premium to its peers. However, we believe the recent
outperformance of the stock has stretched this premium far too high,
with the company now trading at premiums of 34% and 36% over
peers ACC and Ultratech, respectively, on an EV/tonne basis.
Returns to deteriorate going forward
We expect Ambuja Cement to deliver an average ROCE of 26% for
the CY10-CY12F period, down from the 33% average ROCE that the
company generated for the CY06-CY09 period. Valuations, however,
do not seem to reflect this decline in profitability and imply an average
ROCE of 32% for the company during CY10–CY12F on our estimates.
Consolidation with ACC/Holcim may take time
There have been expectations in the market that Holcim might
consolidate its two cement companies in India (ACC and Ambuja
Cement) into a single entity. However, our interaction with the
management suggests that this will be a long-drawn process and that
parent Holcim is in no hurry to undertake this consolidation.
Valuation
We now value Ambuja Cement on an EV/IC-based methodology, in
which the multiple is derived using an average ROCE of 26% for the
CY10-CY12F period and a WACC of 12.7%. We retain our REDUCE
rating on the stock, with a revised target price of INR113 which
represents 23% downside and implies an EV/EBITDA of 6.6x and an
EV/tonne of US$137 on Ambuja Cement’s CY11F financials.
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