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Emphasizing on growth, efficiency and sustainability

Capacity additions to drive volume growth

Ambuja Cements (ACEM) is a leading cement player with an installed cement capacity of 31.5mtpa as of CY21. In this note, we analyze ACEM’s CY21 Annual Report (AR). The key highlights of our analysis are as follows: a) ACEM completed the expansion project at Marwar, Mundwa and announced the next phase of expansion in East India; b) its increased capex on development and efficiency to improve profitability and return ratios; and c) the management validated sustainability targets to reduce carbon emissions.

The management estimates cement demand to grow at more than 7% YoY in CY22 backed by: a) structural demand from housing, rural, and infrastructure and b) pick-up in industrial/commercial capex. The management estimated an industry volume growth of 13% YoY in CY21 v/s 8.6% YoY in CY20.

Announces capacity expansion in the East, timely completion is vital

ACEM commissioned the Greenfield integrated cement plant having clinker capacity of 3mtpa and grinding capacity of 1.8mtpa at Marwar Mundwa, Rajasthan. With this expansion, ACEM’s clinker/grinding capacity increased 18%/6.1% to 20.8mtpa/31.5mtpa, respectively as of CY21.

Further, the company has announced 7mtpa grinding capacity expansion in East India (in addition of 1.5mtpa in Ropar, Punjab). Post-completion of these expansions (by CY24E), ACEM’s grinding capacity will rise 27% to 40mtpa.

Apart from these, ACEM is identifying debottlenecking opportunities in its East and West India plants to achieve its medium-term capacity target of 50mtpa.

Robust volume growth and efficiency measure to drive profitability

In CY21, ACEM posted 21% YoY EBITDA growth to INR32b mainly fueled by strong 19% YoY volume growth to 27mt. Its capacity utilization rose 9.5pp YoY to 86%.

The share of premium products in revenue increased 170bp YoY to 12%, which improved realization. Blended realization rose 3% YoY to INR5,168 in CY21.

Total operating costs grew 3.4% YoY to INR3,989/t due to a spike in fuel prices, higher raw material costs and increase in fixed overheads. However, cost optimization measures (reduction in clinker factor, energy efficiency, raw material mix, fuel mix optimization and lower lead distance) partly offset the adverse impact of higher input material costs.

In CY21, ACEM’s EBITDA/t was up 2% YoY to INR1,180 (the highest after CY07). However, EBITDA margin contracted slightly by 30bp YoY to 23%.

ACEM spent INR3.8b towards development and efficiency capex in CY21. It commissioned the Railway Siding at Rabriyawas. ACEM is installing Waste heat recovery system (WHRS) at various locations (53MW capacity in CY22E), setting up fly ash dryers/hot air generators at different locations to ensure dry fly ash availability and acquiring limestone mines to secure long-term limestone requirements.

Higher cash conversion days due to increase in inventory

ACEM’s cash conversion cycle increased (16 days in CY21 v/s 2 days in CY20), mainly due to an increase in inventory days in CY21 led by higher fuel price.

ACEM has been generating strong cash flows since CY19 and its cumulative OCF stood at INR76b during CY19-21 (v/s INR38b over CY16-18). FCF stood at INR43b during CY19-21 (v/s INR23b over CY16-18).

ACEM has continued to remain a net cash company since CY07 and it has a net cash balance of INR41b in CY21 v/s INR29b in CY20. We expect its net cash to be at INR44b in CY22/CY23.

ACEM has recommended a dividend of INR6.3/share (60% payout) in CY21 v/s INR18.5/share (205% payout that included a special dividend of INR17) in CY20

Expensive valuations; maintain Neutral

ACEM completed its expansion in the North during CY21 that increased its clinker capacity by 3.1mtpa (to 20.8mtpa) and grinding capacity by 1.8mtpa (to 31.4mtpa). The company aims to increase its grinding capacity to 50mtpa in the medium term through: 1) capacity expansion of 7mtpa/1.5mtpa in the East/North regions, respectively, and 2) debottlenecking at various plants.

The various cost saving initiatives (commissioning of WHRS/Solar power plants, start of coal mining from Gare-Palma IV coal block, benefits from MSA with ACC, etc.) will help ACEM control its operating costs. Moreover, the management believes that there is further scope for cost improvements (INR300/t achieved in the last two years).

ACEM trades at 18.9x/15.1x CY22E/23E EV/EBITDA and USD222/USD217 CY22E/ 23E EV/ton, respectively. The stock has traded at an average EV/EBITDA of 12.8x over the last 10 years. We value it at 12.5x CY23E EV/EBITDA and 20% HoldCo discount for its holding in ACC to arrive at our TP of INR350. Our TP implies a potential downside of 9% from CMP. Hence, we maintain our Neutral rating on the stock. In the near term, ACEM’s stock price movement will be governed by news flows related to its promoter group Holcim’s exit from India.

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