ICICI Sec: Buy Ambuja Cements ; Target Rs 161

Post capacity expansion, Ambuja Cements (ACEM) is set to strengthen its
presence in the North and the East, which are likely less vulnerable to pricing
pressure. Volume growth would accelerate to ~10% as capacities are ramped up to
27mnte by end ’10E. ACEM is best placed among peers to contain margin erosion
led by better realisation, increased power from CPP, lower imported coal costs
and better logistic infrastructure. Capacity addition in the North and the East
(lower pricing pressure) and no presence in the South (high pricing pressure)
besides higher proportion of premium retail sales and increased rural penetration
will ensure better realisation. Hence, ACEM would continue to enjoy valuation
premium versus peers. ACEM outperformed the broad markets ~23% and peers
13-18% in the past year and is currently valued at CY11E EV/E of 8.6x and
US$161/te. Maintain BUY with Rs161 target price (8.5x average CY11-12E EV/E).
Increase in stake by Holcim and merger with ACC can provide additional triggers.
􀁦 Next expansion phase likely to be announced by end-CY10. ACEM is likely to
announce ~7mnte new capacity in its existing markets (to maintain its market share),
which is expected to be operational after CY13E. The current net cash is in excess of
Rs18bn and ACEM is expected to generate Rs17bn FCF over CY10E-12E. ACEM is
scouting for acquisitions, but valuations are the key hindrance. Thus, ACEM is best
placed to fund its next phase of expansion.
􀁦 Best placed among peers to contain margin erosion. ACEM commissioned
109MW CPP in CY09 and another 30MW in Q1CY10, the full benefit from which
would accrue in CY10E. The share of imported coal in fuel mix will likely reduce to
~25% from 30% and that of pet coke rise from 10%, leading to fuel cost savings.
Better logistic infrastructure and benefit of sea transport would contain freight costs.
􀁦 EPS CAGR of 14% in CY11E-12E. We factor in a 10% volume growth with average
realisation inching up 1.5-3.5% over CY11E-12E. With the North, the Central and the
East constituting 63% of revenues and no exposure in the South, ACEM’s
realisations would lead the industry. EBITDA margin is likely to be ~27-28% in ’10E-
12E. We raise our EBITDA estimates ~2-4% for CY10-11E.
􀁦 Valuation premium to sustain. Given better geographic presence, superior
realisations, consistent and industry leading margins, improving financial
performance and strong cashflow & balance sheet, we expect ACEM to continue
enjoying premium valuations versus peers.