Ambuja Cements -New capacity, de-bottlenecking to drive growth :Motilal Oswal

Prices holding up; limited downside risks to profitability
 The company expects cement volumes to grow 8-9% in CY12. Infrastructure and
rural economy would be the major long-term growth drivers.
 Pricing has been holding up and the management sees limited downside risks to
profitability, given the higher capex costs.
 Post the recent outperformance, the stock is trading at a premium to historical
average valuations. We expect strong earnings growth to be the key driver of stock
performance. Buy.

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Cement volume to grow 8-9% in CY12; de-bottlenecking to aid further
delta
 Ambuja expects 8-9% volume growth in CY12 (base case); ramp-up in
infrastructure spending given pent-up demand before elections has potential
to boost growth to 9.5%+.
 Infrastructure and rural economy would be major long-term growth drivers.
Almost 65-70% of Ambuja's retail volumes come from IHB demand (v/s
industry average of 57%).
 Dispatch growth over next 2-3 years will be driven by (a) de-bottlenecking
and (b) new capacity addition of 3mt (2.2mt integrated greenfield clinker
capacity at Rajasthan and 0.8mt of grinding units at Sankrail).
 Rajasthan plant has already got environment clearance and limestone security,
while land acquisition is in progress (capex of INR22b). The plant is expected
to be commissioned by end-FY14. Grinding units at Sankrail will be operational
in 1QCY13. CY12 capex budget would be ~INR7b.
 Monsoon has been delayed but not very weak. Expect no major adverse impact
in rural demand, unless next year's monsoon also surprises negatively.
Prices holding up; limited downside risks to profitability
 Pricing has been strong, amidst lower seasonal dip. Ambuja expects seasonal
drop to reverse in October.
 It expects demand-supply equation to improve with only 35mt capacity
addition for industry over next 2-years (v/s our estimate of 60-65mt).
 The management sees no major downside risks to profitability as new
capacities would require to earn EBITDA/ton of INR1,500 to earn reasonable
return on capital.
 Favorable imported coal prices are yet to benefit the company owing to weak
rupee. (It uses ~40% imported coal and 13-14% pet coke.)


Other takeaways
 Strategic acquisition of limestone mine (85% stake in Dang Cement) could help in
serving east India markets; but the plan of action is yet to be finalized.
 Ambuja believes it has a strong case in CCI issue. Nonetheless, if Appellate Tribunal
verdict goes unfavorable, the companies have to deposit only 10% of penalty
amount during period of further legal procedures.
 Sea route accounts for almost 16% of Ambuja's freight; but this is lower during
monsoon season.
Valuation and view
 Ambuja Cements offers favorable market mix (negligible exposure to the weak
South India market), well-diversified fuel mix and efficient operations, translating
into above-average profitability.
 Post the recent outperformance, the stock is trading at a premium to historical
average valuations, leaving limited room for further re-rating. We expect strong
earnings growth to be the key driver of stock performance.
 The stock trades at 14.3x CY13E EPS, and at an EV of 8.1x CY13E EBITDA and USD163/
ton. Maintain Buy, with a target price of INR208 (EV of ~9x CY13E EBITDA).