Ambuja Cements: Market mix favorable in short run; upgrade to Buy :: Motilal oswal,

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Ambuja Cements: Market mix favorable in short run; upgrade to Buy
Volume growth
 We expect volume growth to improve to
10.5% CAGR over CY10-12 as against 6%
CAGR over CY08-10.
 The recently commissioned capacities of 7m
tons would be sufficient to drive growth over
the next two years.
 Since it would be replacing purchased clinker
with captive clinker, its incremental volumes
from these capacity additions would be lower.

Market mix
 Ambuja is focused on West, North and East
India, and has small exports, as well.
 Incremental volumes would be from the North
and East regions, where price increases have
been the highest.
 We expect Ambuja's 1QCY11 realization to
improve by Rs20/bag QoQ.
Cost and profitability
 Ambuja has a well diversified fuel mix, with
only 55-57% dependence on domestic coal.
We estimate Rs2-2.5/bag increase in cost
due to increase in domestic coal prices by
Coal India.
 Full benefit of shift to captive clinker is fully
reflected in CY09 financials, resulting in
~Rs12/bag savings in RM cost.
 We estimate EBITDA/ton to improve by
Rs450 QoQ in 1QCY11 to Rs1,080 and by
Rs140 in CY11 to Rs1,048.
Valuation & view
 The stock has corrected meaningfully, as its
operating performance was under pressure
in the last two years.
 However, with superior profitability being
restored, we expect a re-rating.
 Creeping acquisition by Holcim would provide
support to the stock price.
 The stock is valued at 13.5x CY11E EPS,
and at an EV of 7.9x CY11E EBITDA and
US$150/ton (~27m-ton capacity). Upgrade to
Buy, with a target price of Rs169 (~10x CY11E
EV/EBITDA).
Ambuja Cements: Market mix favorable in short run; upgrade to Buy
 Volume growth to pick up: We expect volume
growth to improve to 10.5% CAGR over CY10-
12, as against 6% CAGR over CY08-10.
Volume growth would be driven by the recently
commissioned capacities of 7m tons. Since
Ambuja would be replacing purchased clinker
with captive clinker, incremental volumes from
these capacity additions would be lower.
 Incremental volumes from North and East:
Incremental volumes for Ambuja would be
derived from the North and East regions, where
price increases have been the highest. We
expect Ambuja's 1QCY11 realization to improve
by Rs20/bag QoQ.
 Well diversified fuel mix: Ambuja has a well
diversified fuel mix, with only 55-57%
dependence on domestic coal (~33% linkage).
~30% of its coal requirement is met by imported
coal and the balance by domestic pet-coke. We
estimate Rs2-2.5/bag increase in cost due to
increase in domestic coal prices


Ambuja Cements: Levers present for re-rating
 Return of superior profitability: Ambuja's
superior profitability would be restored driven
by replacement of purchased clinker with
captive clinker. We expect EBITDA to improve
from Rs993/ton in CY09 to Rs1,048/ton in
CY11 (as against MOSL Cement Universe
EBITDA/ton of Rs1,125 and Rs894,
respectively).
 Strong balance sheet with net cash of Rs19/
share: With completion of major capex and
strong cash flow from operations (~Rs20b in
CY11), we estimate Ambuja's net cash balance
at Rs19/share.
 Creeping acquisition by Holcim to support
stock: Holcim's creeping acquisition (full 5%
limit available for FY11) would provide support
to the stock.
 Merger of ACC and Ambuja inevitable, but
unlikely in near future: Merger of ACC and
Ambuja is inevitable for Holcim to fully reap
synergies of operations from (a) coordination
at market level, (b) freight optimization, and (c)
savings on SG&A. However, we believe there
are challenges in the form of (a) cultural
differences and (b) brand migration, which
Holcim would need to address before the
merger of two entities


Ambuja Cements: Valuation and view
 The stock has corrected meaningfully, as its
operating performance was under pressure in
the last two years.
 However, with full benefit of new capacities
(helping to reduce dependence on purchased
clinker) and captive power plant realized,
Ambuja's superior profitability is restored, which
should drive re-rating of the stock.
 Creeping acquisition by Holcim would provide
support to the stock price.
 The stock is valued at 13.5x CY11E EPS, and
at an EV of 7.9x CY11E EBITDA and US$150/
ton (~27m-ton capacity). Upgrade to Buy, with
a target price of Rs169 (~10x CY11E EV/
EBITDA).