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Initiation: cost-efficient cement
player
• Has a strong presence in regions where demand for cement is high,
hence better pricing power than peers
• Recent clinker additions should help improve margins despite
rising power and freight costs
• Attractive EV/EBITDA multiple compared with other large cement
players
What's new
Ambuja has a presence in the regions
where demand growth for cement is
strong, eg, in the north, east and west
of India, giving it stronger pricing
power than its peers. We believe it is
the most efficient cement player of
those we initiate coverage of in this
report.
What's the impact
We forecast Ambuja to increase its
installed capacity to 27mt in 2011
from 23mt in 2009, which should
help the company to attain higher
sales growth compared with the
industry on average. We forecast sales
volume of 21.4mt (up 6.5% YoY) for
2011, rising to 23.6mt (up 10% YoY)
for 2012. We forecast the EBITDA
margin to remain at around 25-27%
for 2011-13, despite rising power and
freight costs, due mainly to cost
savings driven by the replacement of
clinker purchased externally with that
produced in-house.
Despite capex of Rs39bn over 2008-
10, the company ended 2010 with net
cash of Rs22bn. We forecast it to
generate free cash flow of Rs18bn over
the next two years.
What we recommend
We forecast Ambuja’s earnings to rise
at a CAGR of 17.1% over 2010-13. The
stock is trading currently at a
premium to ACC and Ultratech on an
EV/EBITDA and EV/tonne basis for
2011/FY12. We initiate coverage with
a Buy (1) rating and six-month target
price of Rs162, based on a 2012E
EV/EBITDA multiple of 8.5x. We
believe the stock deserves to trade at a
higher EV/EBITDA than the other
two players, given its higher margins
and strong regional presence. It is
trading currently at a PER of 17x and
an EV/EBITDA multiple of 9.4x for
2011E, and at an EV/t of US$152
based on 2011E capacity of 27mt (all
on our forecasts).
How we differ
Our 2011-12 EBITDA forecasts are
1.6% and 8.4% higher than the
Bloomberg-consensus forecasts,
respectively. We believe the market is
currently factoring in a weak cementpricing
environment and hence
margin pressure for the cement
producers, given the prospect of
continuing cement overcapacity for
the next 12 months. However, we
believe such overcapacity could be
absorbed quickly if demand improves.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Initiation: cost-efficient cement
player
• Has a strong presence in regions where demand for cement is high,
hence better pricing power than peers
• Recent clinker additions should help improve margins despite
rising power and freight costs
• Attractive EV/EBITDA multiple compared with other large cement
players
What's new
Ambuja has a presence in the regions
where demand growth for cement is
strong, eg, in the north, east and west
of India, giving it stronger pricing
power than its peers. We believe it is
the most efficient cement player of
those we initiate coverage of in this
report.
What's the impact
We forecast Ambuja to increase its
installed capacity to 27mt in 2011
from 23mt in 2009, which should
help the company to attain higher
sales growth compared with the
industry on average. We forecast sales
volume of 21.4mt (up 6.5% YoY) for
2011, rising to 23.6mt (up 10% YoY)
for 2012. We forecast the EBITDA
margin to remain at around 25-27%
for 2011-13, despite rising power and
freight costs, due mainly to cost
savings driven by the replacement of
clinker purchased externally with that
produced in-house.
Despite capex of Rs39bn over 2008-
10, the company ended 2010 with net
cash of Rs22bn. We forecast it to
generate free cash flow of Rs18bn over
the next two years.
What we recommend
We forecast Ambuja’s earnings to rise
at a CAGR of 17.1% over 2010-13. The
stock is trading currently at a
premium to ACC and Ultratech on an
EV/EBITDA and EV/tonne basis for
2011/FY12. We initiate coverage with
a Buy (1) rating and six-month target
price of Rs162, based on a 2012E
EV/EBITDA multiple of 8.5x. We
believe the stock deserves to trade at a
higher EV/EBITDA than the other
two players, given its higher margins
and strong regional presence. It is
trading currently at a PER of 17x and
an EV/EBITDA multiple of 9.4x for
2011E, and at an EV/t of US$152
based on 2011E capacity of 27mt (all
on our forecasts).
How we differ
Our 2011-12 EBITDA forecasts are
1.6% and 8.4% higher than the
Bloomberg-consensus forecasts,
respectively. We believe the market is
currently factoring in a weak cementpricing
environment and hence
margin pressure for the cement
producers, given the prospect of
continuing cement overcapacity for
the next 12 months. However, we
believe such overcapacity could be
absorbed quickly if demand improves.
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