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Published on 10/04/2020 2:30:09 PM | Source: ICICI Securities Ltd

Buy Ambuja Cements Ltd For Target Rs. 205 - ICICI Securities

Posted in Broking Firm Views - Long Term Report| #Ambuja Cements Ltd #Cement Sector #Broking Firm Views Report #ICICI Securities

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AR analysis – Focus on completion of expansion

Key takeaways from Ambuja Cements’ (ACEM) CY19 annual report include: i) company has increased focus on cost efficiencies and value-added products (VAP); synergies from MSA with ACC is expected to increase in CY20-CY21E; ii) company is aiming to complete Marwah Mundra expansion projects by CY20-end; volume growth / profitability to pick up from CY21E; iii) EBITDA to OCF conversion stood strong at 133% in (vs 45% in CY18); net cash increased by Rs13.7bn in CY19 to Rs46.6bn. Post recent 25% correction, the stock is trading at an attractive valuation of 6.3x CY21E EV/E and US$60/te (for consolidated ~71mnte capacity) – more than 40% discount to past 10-year average. Maintain BUY with a target price of Rs205/share (9x Mar’22E EV/E).

 

* Capex to improve cost efficiencies: ACEM plans to set up WHRS plants at Darlaghat and Bhatpara (19.5MW at each location) at capex of Rs3.8bn, which are expected to be commissioned by Q2CY21. Subsequently, ACEM is looking to set up WHRS plants at Maratha and Ambujanagar and also solar plants totalling 40MW. Railway sidings project at capex of Rs2.1bn at Rabriyawas, Rajasthan, and underground mining at the auctioned Gare-Palma coal block (at Rs3.6bn capex) are expected to be complete by H1CY20. The group has also likely achieved savings of Rs40mn-50mn p.m. (to be shared between ACC and ACEM) under MSA and can double the same over CY20-CY21E. Management is targeting to increase VAP volumes to 15% of trade sales (vs ~10% now) in coming years.

 

* Realisation grew by a healthy 4.4% in CY19 mainly owing to sharp price increases in North and Gujarat regions. This resulted in 14% YoY increase in EBITDA despite 1% YoY decline in volumes. Government incentives declined 11% YoY to Rs2.1bn (Rs86/te) while incentive receivables rose Rs1.7bn to Rs5bn in CY19. With expiry of all major incentives from Mar’20, incentive income would almost cease.

 

* Targeting to complete 3.1mnte greenfield clinkerisation plant at Marwar Mundwa in Rajasthan, cement grinding capacity of 1.8mnte and WHRS at a total capex of Rs23.5bn by Dec’20. 40% of civil work has been completed and mechanical erection commenced in Q1CY20. This will take total cement capacity to ~32mnte, strengthen the company’s position in the core markets of North and Gujarat and aid volume growth / profitability from CY21E. ACEM has paid ~Rs1bn towards purchase of fixed assets to parent Holcim during CY19.

 

* EBITDA to OCF conversion stood at 133% in CY19 (vs 45% in CY18): Net cash increased by Rs13.7bn in CY19 to Rs46.6bn as the company generated FCF of Rs16.9bn post capex of Rs11bn and dividend payment of Rs3.3bn. Post recent 25% correction, the stock trades at an attractive valuation of 6.3x CY21E EV/E and US$60/te (for consolidated ~71mnte capacity) – more than 40% discount to past 10- year average.

 

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