Melody from clinker- Ambuja Cements:: Elara

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Melody from clinker
Capacity expansion to drive volume growth
Ambuja Cements Limited (Ambuja) would complete its expansion in
CY10 to take the total cement grinding capacity to 27mn tonnes. In
Q1CY10, the grinding capacity of the company rose to 25mn tonnes
(from 22mn tonnes), and is expected to be 27 mn tonnes by end of
CY11. However, the clinker capacity of the company will remain at
16.7mn tonnes enabling the company to produce up to 25mn tonnes
of cement. We expect this to lead to a 9.4% volume CAGR over CY09-
11. On the back of volume growth, we expect earnings to grow at a
CAGR of 4.6% despite the subdued pricing regime and higher cost of
production.


Lower clinker purchases to cushion margins
Ambuja’s CY09 earnings were depressed due to the purchase of
clinker from the open market. With its 4.6mn tonnes clinker capacity
that came on stream in Q1CY10, we expect the company to save
~INR165/tonne in CY10 and ~INR236/tonne in CY11. Hence EBITDA
margins of Ambuja are expected to hold around 25-28% in CY10 as
well as in CY11 despite an increase in cost per tonne (ex raw material)
at a CAGR of 5.2% between CY09 and CY11.

Dependence on imported coal to neutralize savings from clinker
Power and fuel costs constitute ~26% of Ambuja’s cost of goods sold.
Ambuja meets 30% of its fuel requirements through imports. The
prices of imported coal have increased by 42% YoY. Thus any increase
in power and fuel cost will partly neutralize the benefit of saving from
lower clinker purchase.

Favorable regional mix: Absence in South to be a boon
We like Ambuja’s regional mix as it does not have any presence in the
Southern region - which is expected to have the worst demand supply
equation. Ambuja has better a regional mix than the other large cap
players hence will be better off as compared to the rest.

Valuation
At the CMP of INR148, Ambuja is trading at 17.2x and 16.9x its
CY10 and CY11 earnings, respectively. On an EV/tonne basis, it is
trading at USD184/tonne and USD180/tonne of its CY10 and CY11
capacities, respectively. The stock is currently trading at a premium
to its replacement cost as well as large cap peers having a pan India
presence. Although, Ambuja has the benefits of efficient operations
and possibilities of volume growth, we believe, the stock price has
already factored in both. Current valuations are already close to the
average peak EV/tonne that Ambuja has traded at. Therefore,
considering the steel valuations and steep premium to its large cap
peers as well as replacement cost, we initiate coverage of Ambuja
Cements with a Sell rating and a target price of INR119.