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Expansion to improve near-term volumes…

…but growth visibility remains weak beyond CY22

* Ambuja Cements (ACEM)’s 2QCY21 results highlight the company’s continued focus on cost reduction, leading to the highest ever EBITDA/t of INR1,495/t. Volumes also grew 53% YoY on the lower base of Jun’20.

* The commissioning of the Marwar–Mundwa capacity by Sep’21 should drive a 12% CAGR in volumes over CY20–23E. We raise our EPS estimates by 8%/8% for CY21/CY22, factoring in better margins. However, we maintain our Neutral rating on weak growth visibility beyond CY22.

Higher volumes and lower cost drive 24% beat on EBITDA

* Revenue / EBITDA / Adj PAT rose 55%/61%/59% YoY to INR33.7b/INR9.6b/INR7.2b, beating our estimate by 9%/24%/22% – led by higher volumes, lower cost, and better realization.

* Volumes were up 53% YoY to 6.42mt (est. 5.93mt) on account of a lower base. Specialty product volumes grew 69% YoY.

* Cement realization was up 5.3% QoQ (+1.7% YoY) to INR5,206/t v/s our est. of INR5,163/t; blended realization was up 5% QoQ to INR5,251/t (+1% YoY).

* Blended cost per ton was lower than expected at INR3,756/t (+3% QoQ; flat YoY; -4% v/s est.) on account of higher clinker production (with closing inventory being netted out from the cost). This led to better-than-expected fixed cost absorption.

* Thus, it clocked the highest ever EBITDA/t of INR1,495/t (+11% QoQ and +5% YoY v/s est. INR1,300/t). The EBITDA margin stood at 28.5% v/s our est. of 24.9%.

* 1HCY21 revenues / EBITDA / adj PAT rose 40%/62%/63% YoY to INR69.9b/INR19.4b/INR13.9b, led by a 37% increase in volumes to 13.66mt and 3.74pp improvement in EBITDA margins to 27.7%.

* 1HCY21 OCF/capex/FCF stood at INR12.0b/INR4.8b/INR7.1b v/s INR11.3b/INR3.3b/INR8.1b in 1HCY20. OCF and FCF were impacted by clinker inventory buildup, which should support 2HCY21 sales.

Highlights from management commentary

* The greenfield Marwar–Mundwa plant is expected to be commissioned by Sep’21, as guided earlier. Additionally, it has announced a 1.5mt capacity expansion at the existing grinding unit in Ropar (Punjab), which would utilize clinker from the new Marwar–Mundwa plant.

* Costs were in check, which partially offset the surge in diesel, fuel, and raw material prices.

* Specialty products accounted for 12% of sales volumes and blended cement accounted for >90%.

Weak growth visibility beyond CY22; valuations fair

* The Marwar–Mundwa expansion should drive an above-industry CAGR of 12% in volumes over CY20–23E. However, growth visibility remains weak beyond CY22 due to limited capacity additions.

* Therefore, the valuation at 11.9x CY23E EV/EBITDA seems fair, and we maintain Neutral. We value ACEM on 11x CY23E EV/EBITDA and do not ascribe any holding company discount for its stake in ACC.

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