Ambuja (ACEM): Correction to continue  ::HSBC Research

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Ambuja (ACEM):
Correction to continue
 High exposure to excess capacity regions to limit revenue growth
to c12% compounded over CY10-13e
 Increasing costs and low asset turns to limit CROGCI growth
despite rising EBITDA
 Valuations still high given the cycle; initiate with UW, INR110 TP


High exposure to excess capacity regions
ACEM sells c70% of its cement volumes in the
North and the West – regions that, we believe,
will continue to witness excess capacity till CY13.
While pricing discipline might result in prices
recovering post monsoons, capacity utilisation
levels for ACEM will continue to be low.
Muted volume growth for FY12 at just c4%
We forecast volume growth of just c4% for
ACEM for CY11 given the lack of capacity
addition during this year. However, we do build in
c7.5% CAGR in cement despatches for CY10-13e
as capacities get commissioned in CY12.
Flattish EPS growth and falling CROGCI,
despite c9% growth in EBITDA
We forecast EPS growth of just c6.5% over
CY10-13 and do not expect CROGCI by CY13 to
reach the levels attained in CY09 as (1) we expect
the EBITDA margin to correct following higher
costs and (2) we assume that asset turns reduce in
the initial years, as new capacity does not
immediately start producing. However, expect
EBITDA to grow at a c9% CAGR over CY10-13
following similar volume growth.
Costs will likely stay high despite selfproduced
clinker
We forecast CY11 costs to be higher than that of
CY09 (when ACEM bought 1.7mt of clinker)
following higher coal and freight costs – and do
not expect a respite on these accounts over the
next three years. Consequently, we expect costs to
increase at c4% CAGR over the next three years.
Valuations still high given the cycle; initiate
with Underweight and TP of INR110
ACEM has corrected c15% over the last 3 months
post Holcim’s acquisition of a majority stake.
Adjusting historical multiples for an acquisition
premium, and based on a combination of various
valuation approaches (EV/EBITDA, PE and
CROGCI to WACC), we initiate on ACEM with
UW and a TP of INR110.
Risks
Higher-than-expected increases in cement
prices could improve the company’s
profitability drastically.