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Growth concerns now being addressed…

Ambuja Cement in its AGM has laid out ambitious growth plans to increase its capacities in India with the target of becoming a 50 MT player from current 29.7 MT. In terms of regions, the company is exploring opportunities in the markets of East and West India, with brownfield expansions in Bhatpara and Maratha plants. While its upcoming facility in Marwar Mundwa, Rajasthan will enhance clinker capacity by 3 MT, it would help improve cement sales by ~5 MT. Apart from this, the company is also looking at significant debottlenecking opportunities across all its plants to further enhance their cement capacity. Given the strong demand outlook, we believe these move would allay the growth concern, also enable it to capture the lost market share and maintain its position. Further, deployment of strong operating cash towards capacity expansion in an efficient manner would improve return ratios. Given these developments, we now upgrade the stock from HOLD to BUY recommendation.

Cement demand to continue to remain robust

After witnessing modest demand decline of ~2.0% in FY21 cement demand is expected to witness a strong upcycle in FY22E led by urban housing recovery and infra push by the government. While demand in H1FY21 was largely driven by strong rural housing demand, urban housing and infra segment aided recovery in H2FY21. Going forward, higher budgetary allocation by the government on infrastructure (up 26% YoY | 5.54 lakh crore), lower interest rates and recovery in private capex would continue to support the strong cement demand and help improve asset utilisation further to over 80% (ex-South) by FY23E from 68% in FY21.

Strong b/s to support growth, help improve RoE

The ongoing capex at Marwa Mundwa with total investment of | 2350 crore is mainly funded through internal accruals and would commence operations by Q3FY21. While we await clarity on capex on incremental capacity of ~15 MT, we believe the capex would be far lower on a per tonne basis than the capex required for brownfield expansions as majority of these new capacities would be added though de-bottlenecking. Hence, we believe the cash balance of over | 2700 crore and annual OCF of | 2500 crore is sufficient to support these expansions. Overall, this move would not only aid in gaining market share but also would help improve return ratios.

Valuation & Outlook

With the growth concerns now being addressed, we expect Ambuja to get back to industry leading growth trajectory as and when this new capacity comes on stream. While we await clarity on the timeline and the quantum of amount required for these expansions, we revise our target multiple upwards to factor in this positive development and upgrade our rating from HOLD to BUY with a revised target price of | 365/share (i.e. at CY22E EV/EBITDA of 14.0x, implied EV/tonne of $154/t, factoring in additional 15 MT for Ambuja, earlier TP: | 305).

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