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Neutral Ambuja Cements Ltd For Target Rs.320

Expansion to improve near-term volumes…

…but growth visibility remains weak beyond CY22

* Ambuja Cements (ACEM)’s 1QCY21 results highlight the company’s continued focus on cost reduction, leading to 62% YoY growth in EBITDA. Volumes grew 25% YoY on the lower base of Mar’20.

* The commissioning of the Marwar–Mundwa capacity (in 3QCY21) should result in a volume CAGR of 11%, in line with the industry, over CY20–23E. However, we maintain our Neutral rating on weak growth visibility beyond CY22.

Lower costs drive 30% beat on EBITDA

* Revenue / EBITDA / Adj. PAT was up 28%/62%/67% YoY to INR36.2b/INR9.8b/ INR6.6b, beating our estimates by +4%/+30%/+38% (led by lower cost).

* Volumes were up 25% YoY to 7.24mt (est.: 6.94mt) on account of the lower base of Mar’20. Specialty product volumes grew 82% YoY.

* Blended realization was flat QoQ (+2% YoY) at INR5,002/t, in line with our estimate.

* Blended cost per ton declined 6% QoQ to INR3,653/t (-5% YoY), below our est. of INR3,917/t. This was attributable to better fixed cost absorption and lower-than-expected freight and power and fuel costs (likely due to petcoke being substituted with cheaper coal).

* Thus, blended EBITDA/t rose 24% QoQ (+29% YoY) to INR1,349 (25% above est). The EBITDA margin stood at 27% (+564bps YoY, +513bps QoQ).

Highlights from management commentary

* Capacity utilization stood at 96% v/s 81% in 1QCY20.  A focus on fixed cost optimization and operating leverage led to 17% YoY decline in other expenses per ton. Freight cost per ton also declined 5.6% YoY due to improved logistic efficiencies and MSA gains, partially offset by an increase in diesel prices.

* Specialty products accounted for 12% of sales volumes.

* The greenfield Marwar–Mundwa plant has been delayed by a quarter and is guided to be commissioned in 3QCY21.

Weak growth visibility beyond CY22; valuations fair

* The commissioning of the Marwar–Mundwa capacity (in 3QCY21) should result in a volume CAGR of 11%, in line with the industry, over CY20–23E. However, growth visibility remains weak beyond CY22 as no expansion has been announced.

* Therefore, valuations at 10.8x CY22 EV/EBITDA seem fair, and we maintain Neutral. We value ACEM at INR320/sh on 10x Mar’23 EV/EBITDA, and we do not ascribe any holding company discount for its stake in ACC.

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