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We recommend BUY on Ambuja Cements (ACL), as the
company is likely to be the biggest beneficiary of
improvement in utilisation in the eastern, northern and
western markets. The company expanded clinker and cement
capacities in the northern and eastern regions in 4QCY09;
new capacities stabilised in the past year and likely
improvement in utilisation in these two regions should drive
volume growth. ACL is trading at an attractive 8x CY12ii
EV/Ebitda (bottom-of-the-cycle Ebitda margin).
Most favourable market mix: Nearly 90% of ACL’s sales volumes
come from the northern, western and eastern regions. We expect
substantial reduction in fight for market share among cement
companies in these regions from end-CY12, owing to 600-800bps
improvement in capacity utilisation in the next two years and
reduction in incremental supply from new players. We expect ACL’s
margins to improve from CY13 with improvement in pricing power in
all regions in which the company operates. We factor in 300bps
improvement in Ebitda margin on the back of 600-800bps increase in
utilisation in the regions in which ACL operates.
Capacity expansion in its best-performing markets: ACL
expanded cement capacity from 19.5mtpa to 24mtpa in end-CY09
(clinker capacity expansion of 2.2mtpa each in Rauri, North, and
Bhatapara, East). We expect volume growth to improve on: 1)
stabilisation of new capacities in the past year; and 2) return of a
favourable demand-supply scenario in northern and eastern regions.
Efficiency improvement measures are showing results: In
CY08 and CY09, ACL purchased clinker to support cement
production, due to shortage in clinker capacity. Further, it bought
expensive state electricity board (SEB) power in the absence of
sufficient captive power. However, its clinker and captive power
capacities increased in the past two years and are sufficient to
support current cement capacity. Increase in per tonne production
cost in 1QFY12 was the lowest (5%) for ACL over the past three
years among large cement players.
Attractive valuations considering improvement in utilisation;
BUY: We have raised our CY12-13 earnings estimates by 6-12% to
reflect likely improvement in pricing power from 4QCY12 in the key
northern, eastern and western regions. We value the stock at 1-year
forward rolling EV/Ebitda of 8x. We believe ACL’s premium valuation
is justified given its robust brand recall in the retail cement market
and visibility on earnings with presence in favourable regions. Our
revised target price offers 18% upside from the current level.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend BUY on Ambuja Cements (ACL), as the
company is likely to be the biggest beneficiary of
improvement in utilisation in the eastern, northern and
western markets. The company expanded clinker and cement
capacities in the northern and eastern regions in 4QCY09;
new capacities stabilised in the past year and likely
improvement in utilisation in these two regions should drive
volume growth. ACL is trading at an attractive 8x CY12ii
EV/Ebitda (bottom-of-the-cycle Ebitda margin).
Most favourable market mix: Nearly 90% of ACL’s sales volumes
come from the northern, western and eastern regions. We expect
substantial reduction in fight for market share among cement
companies in these regions from end-CY12, owing to 600-800bps
improvement in capacity utilisation in the next two years and
reduction in incremental supply from new players. We expect ACL’s
margins to improve from CY13 with improvement in pricing power in
all regions in which the company operates. We factor in 300bps
improvement in Ebitda margin on the back of 600-800bps increase in
utilisation in the regions in which ACL operates.
Capacity expansion in its best-performing markets: ACL
expanded cement capacity from 19.5mtpa to 24mtpa in end-CY09
(clinker capacity expansion of 2.2mtpa each in Rauri, North, and
Bhatapara, East). We expect volume growth to improve on: 1)
stabilisation of new capacities in the past year; and 2) return of a
favourable demand-supply scenario in northern and eastern regions.
Efficiency improvement measures are showing results: In
CY08 and CY09, ACL purchased clinker to support cement
production, due to shortage in clinker capacity. Further, it bought
expensive state electricity board (SEB) power in the absence of
sufficient captive power. However, its clinker and captive power
capacities increased in the past two years and are sufficient to
support current cement capacity. Increase in per tonne production
cost in 1QFY12 was the lowest (5%) for ACL over the past three
years among large cement players.
Attractive valuations considering improvement in utilisation;
BUY: We have raised our CY12-13 earnings estimates by 6-12% to
reflect likely improvement in pricing power from 4QCY12 in the key
northern, eastern and western regions. We value the stock at 1-year
forward rolling EV/Ebitda of 8x. We believe ACL’s premium valuation
is justified given its robust brand recall in the retail cement market
and visibility on earnings with presence in favourable regions. Our
revised target price offers 18% upside from the current level.
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