A management meet with Ambuja indicates a positive outlook on
company prospects. Cost rationalization and capacity bottlenecks are
immediate focus areas. We retain a Hold rating given steep valuations.
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To contest CCI penalty. The CCI, which accused 10 companies of
cartelization, has penalized Ambuja `11.6bn. Contesting the allegations,
Ambuja will take the case to the Competition Appelate Tribunal; in six
months it expects a verdict. The amount will be reflected as a contingent
liability. The penalty is 14% of FY12 net worth (10-26% for the others).
Demand outlook. Ambuja expects cement demand in CY12 to be 9%,
led by robust demand from retail/individual housing builders (82%
contribution) supported by a strong network of 7,000 dealers and 25,000
retailers. Its strong presence in the growing and high utilization markets
of the North, West and East put it in an advantageous position.
Cost rationalization. Ambuja aims at cost-rationalization via alternative
raw materials (synthetic gypsum, fly ash), cost-efficient sea transport (now
14%) and alternative sources of energy (wind-turbines, waste-heatrecovery
plants). We expect the resultant benefits to trickle in only from
CY14. It expects cost rises in fuel to be lower in CY12 than in CY11.
Growth plans. Ambuja plans `18bn in CY12-13 on maintenance, logistics,
efficiency improvements and remove capacity bottlenecks (to add 0.5m tons
clinker, 0.9m-ton grinding). Delay in start of greenfield/brownfield clinker
projects is a concern as it may curtail dispatch growth in CY13, affecting
market share (now 10%). Clearance for a greenfield site in Rajasthan is under
way; equipment orders are likely in Dec ’12, with a 30-month set-up time.
Valuation. At our `165 price target, the stock would trade at 8x CY12e
EV/ EBITDA. The price target implies a PE of 15.1x and an EV/ton of
US$157. Risks: Coal price hikes, weak cement prices.
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