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Cost-pressure impacts margins; fairly valued on organic growth outlook

Ambuja’s standalone Q3CY22 EBITDA declined 56-57% YoY and QoQ to Rs3bn, coming in 32% below our estimate of Rs4.5bn (Consensus Est: Rs4.7bn). Accordingly, EBITDA/ton declined 62% YoY and 53% QoQ to Rs432 (Emkay Est: Rs670). The Board of Ambuja recently approved a fund-raise of Rs200bn through preferential allotment of warrants (conversion price: Rs419/sh) to promoter group companies, thus increasing the credibility of doubling capacity to 140mt in 5 years, as articulated by the Adani Group chairman recently. Also, Management commented that the extent of progress towards such ambitious growth plans will be evident in 2023. In our base case, we factor-in capacity increase for Ambuja+ACC to 120mt by CY27E (12% CAGR over CY22E-27E) via the organic route (Link). Accounting for the Q3CY22 miss and a more gradual realization of Group-synergy benefits [Rs100/ton over 3 years], we cut our EBITDA estimates for CY22 by 19% and by 8-10% for CY23-24. We maintain our HOLD rating on the stock, with revised Sep-23E TP to Rs480/share (Rs530 earlier). Our DCF-driven fair value implies a 1-year forward standalone EV/EBITDA of 18x.

Results Summary: Cement realization/ton remained flat YoY/declined ~4% QoQ to Rs5,148 (Emkay Est: Rs5,090). Volumes (incl. those for clinker) rose 14% YoY/fell ~5% QoQ to 7.1mt, standing 5% above our estimate. Other operating income declined 11% YoY/increased 11% QoQ to Rs394mn. Total cost/ton inflated by 17% YoY/7% QoQ to Rs4,773 vs our estimate of Rs4,470 owing to higher-than-expected rise in input cost. Adjusted PAT de-grew 65% YoY/82% QoQ to Rs1.5bn; it is adjusted for ‘exceptional items’ of Rs152mn which pertain to expense for the special incentive for certain key employees, pursuant to the change in ownership and control. What we liked: Superior volume growth, ambitious capacity growth targets and increasing focus on ESG. What we did not like: Higher-than-expected cost pressure.

9MCY22 Performance: Cement realization/ton increased ~2% YoY to Rs5,218. Volumes (including those for clinker) rose 10% YoY to ~22mt. Total cost/ton increased 17% YoY to Rs4,473. Standalone EBITDA declined 33% YoY to Rs17.8bn, whereas EBITDA/ton fell 39% YoY to Rs811. We have yet to move our estimate from December to March. The Group has terminated its agreement with Holcim Technology for payment of technology & know-how fees @1% of the eligible net sales, wef 16-Sep-2022.

Project Updates: The company had earlier mentioned its plans for commissioning a 1.5mt cement grinding capacity in the North by Jun-23 and clinker/cement grinding capacities of 3mt/7mt, respectively, in the East by H2CY24. Post this expansion, its total capacity will increase to 40mt, from 31.5mt currently. Besides, Ambuja targets achieving 50mt capacity over the next few years via capacity expansion in the West and debottlenecking at various locations. In addition, the recent announcement on a fund-raise of Rs200bn via preferential allotment to promoters will help the company achieve its target of doubling cement capacity over the next five years. On WHRS projects, Company has partially commissioned capacities at Bhatapara, Rauri and Marwar-Mundwa, and its Ambujanagar and Maratha plants are progressing well.

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