Published on 9/10/2018 10:56:44 AM | Source: Religare Securities Ltd

Buy Ambuja Cements Ltd For Target Rs.262.00 - Religare Sec

Demand uptick, capacity expansion to drive future growth

Incorporated in 1981, Ambuja Cements Ltd (ACL), a part of the global conglomerate LafargeHolcim (63.1% holding in ACL), is one of the leading cement players in India. Currently, the company has a cement grinding capacity of 29.7 MTPA (North & West account for 80% of total capacity) with five integrated cement manufacturing plants, clinkerisation capacity of 17.7 MTPA, eight grinding units across the country and three bulk cement terminals. Including ACC (50.05% subsidiary), ACL has a pan India footprint with consolidated cement capacity of 63 MTPA. The company has a wide network of dealers / retailers with nearly 70% of the retail sales coming from small towns and villages. With a strong footprint in the North, West and East parts of India, and a presence in the South, ACL covers key locations in each region.


Investment Rationale

Outlook of Cement sector looks bright:

The cement industry is witnessing a gradual revival with improvement in utilization levels and operational efficiencies. The government interventions such as hike in MSP for Kharif & Rabi crops and increased spending on rural and labour intensive infrastructure is likely to result in improved rural demand. This combined with Government's increasing focus on infrastructure development (roads, ports, irrigation) and driving affordable housing segment through low cost housing schemes (ambitious target of constructing 1.2cr houses for urban residents by 2020 and build 1cr houses in rural areas by March 2019 under PMAY scheme) is expected to create buoyancy in the construction sector and boost the overall demand for cement. With strong brand equity, wide distribution reach and steady capacity addition, ACL is well placed to capitalize on the available opportunities.


Demand uptick, capacity expansion to drive revenue growth:

ACL is looking to set up a 3.1 MTPA clinkerisation plant at Marwar Mundwa in Rajasthan. An initial investment of Rs.1,391cr towards the first phase of 1.7 MTPA capacity has been approved and is expected to commission in H2CY20. This would increase the total installed capacity to 31.4 MTPA, thus resulting in improved volume growth visibility over long term. Further, despite the current capacity constraints (utilization at ~86% in H1CY18), we expect ACL to achieve a decent volume growth of 5.5% CAGR over CY17-19E. Demand uptick and innovative product launches with increasing focus on premium products (like Compocem & Ambuja plus cool walls) would enable the company to drive its overall revenue growth with improved realizations over the next two years.


Outlook & Valuation:

ACL’s financial performance in H1CY18 stood healthy with improved utilization levels, healthy cement dispatches, and better realization. Led by anticipated revival in demand (especially in North & West) and company’s efforts towards brand building & distribution expansion, ACL’s standalone net revenue and PAT are estimated to grow by 9.6% & 13.3% CAGR respectively over CY17-19E. Volume offtake would remain healthy (estimated to grow by 5.5% over CY17-19E). Further, increasing sale of fast growing premium products would result in better realizations going forward. Moreover, the capacity expansion in Rajasthan would wane out the ongoing concerns over capacity constraints and provide volume growth visibility over long term. While rising power & fuel prices and increasing freight cost will continue to put pressure on the margins in the near term, we expect the same to be offset by cost efficiency measures going ahead. We estimate a meaningful margin improvement for ACL in CY19E. Leverage free balance sheet, healthy cash flows and healthy dividend pay-outs (40-60%) should provide valuation comfort. Valuing the stock on SOTP basis (standalone business on EV/EBITDA and ACC’s value on market cap basis), we arrive at price target of Rs 262. We recommend Buy.


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