Large Cap : Reduce Ambuja Cements Limited For Target Rs. 485 - Geojit Financial Services
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Decent topline growth; profit tanks
Ambuja Cements Ltd (ACEM) is a leading cement company in India. It is the building materials arm of the diversified Adani Group. The company currently has a cement capacity of ~31.5 million tons (MT).
* Revenue grew 7.5% YoY to Rs. 7,143cr in Q3FY23, led by robust cement volume growth.
* EBITDA margin contracted by 1660bps YoY to 4.7% owing to a sharp rise in fuel costs. Q3FY23 adjusted PAT plunged 81.3% YoY to Rs. 125cr.
* ACEM reported a weak quarter in terms of profitability. Inflationary energy prices may continue to pressurise margins in coming quarters and considering recent equity dilution because of preferential allotment, we downgrade our rating to REDUCE on the stock with a revised target price of Rs. 485 based on 14x FY24E EV/EBITDA.
Topline supported by robust volume growth
ACEM’s consolidated revenue rose 7.5% YoY to Rs. 7,143cr in Q3FY23, driven by robust 12% YoY cement volume growth to 6.7 MT vs. 6 MT in Q3CY21. Realisation was in line with the market trend at Rs. 5,148/ton (t) in Q3FY23. Net standalone sales increased 14% YoY to Rs. 3,631cr compared with Rs. 3,193cr in Q3CY21, supported by volume growth.
Margin slumps amid high cost pressure
EBITDA tumbled to Rs. 334cr in Q3FY23 vs. Rs. 1,416cr for Q3CY21, impacted by a significant increase in fuel costs, partly mitigated by coal supply from captive coal blocks and a reduction in logistics costs. EBITDA margin plummeted 1660bps YoY to 4.7%. In Q3FY23, raw material costs rose 6.7% YoY to Rs 433/t vs. Rs 406/t in Q3CY21, mainly because of higher fly ash and gypsum prices. Power and fuel costs spiked 61% YoY to Rs. 2,006/t vs. Rs. 1,245/t in Q3CY21, led by a steep rise in global energy prices. At the same time, the freight cost per ton declined on the back of increased synergy and efficiency gains. Other expenses were also marginally higher. Q3FY23 adjusted PAT dropped 81.3% YoY to Rs. 125cr.
Key highlights
* During Q3FY23, waste heat recovery system (WHRS) projects at the Bhatapara, Rauri, and Marwar plants were partially commissioned. WHRS projects at the Ambujanagar and Maratha plants are progressing well.
* Ambuja Cements has allotted 47.74cr. warrants on a preferential basis to Harmonia Trade and Investment Ltd at a price of Rs 418.87, totaling Rs 20,001cr.
* The company has plans to double its consolidated capacity to ~140 MT in the next five years at a significant 16% CAGR. The promoters are expected to fund about Rs. 20,000cr through warrants.
* ACEM has changed its financial year end from December 31 to March 31. Therefore, the current financial year has been extended by three months to end on March 31, 2023.
Valuation
ACEM reported a weak quarter, largely impacted by inflationary cost pressure. A sharp rise in global energy prices has kept cement industry margins under pressure and it may continue to be remain stressed owing to current high energy prices. Also considering the equity dilution due to preferential allotment makes the stock less attractive, hence we downgrade our rating to REDUCE on the stock with a revised target price of Rs. 485 based on 14x EV/EBITDA on FY24E.
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