Buy Ambuja Cements Ltd For Target Rs.600 by Motilal Oswal Financial Services Ltd
Weak realization and cost pressure drag performance
Volume growth of 17% YoY, majorly driven by inorganic expansions
*Ambuja Cements (ACEM)’s 3QFY25 consolidated EBITDA (adjusted for prior period incentives of INR8.3b) declined ~49% YoY to INR8.9b (-35% vs. est.), due to weak realization and higher opex/t (up to INR100-150/t related to acquired assets that are in the transition and ramp-up phase). EBITDA/t declined 56% YoY to INR537 (est. INR848). PAT (adjusted for the reversal of tax provisions) declined 50% YoY to INR4.1b (-28% vs. our estimate).
*Management indicated consol. volume growth of ~17% YoY, with ~10% of this growth driven by two major inorganic expansions (Sanghi and Penna Cement). Currently, both companies are in the transition and ramp-up phase, and the company is implementing various cost-reduction initiatives. It expects plant capacity utilization for both companies to increase 70%+ in FY26 vs. sub-40% utilization currently.
*We reduce our FY25/26/27E EBITDA by 22%/17%/9% due to lower EBITDA/t assumptions. We also reduce our valuation multiple to 18x EV/EBITDA (vs. 20x earlier), a 10% discount to UTCEM. ACEM (consol.) trades at 20x/15x FY26/FY27E EV/EBITDA. We maintain our BUY rating with a revised TP of INR600 (earlier INR750).
Blended realization/t decline 11% YoY; opex/t up 2% YoY
*Consol. revenue/adj. EBITDA/adj. PAT stood at INR85.0b/INR8.9b/INR4.1b (up 5%/down 49%/50% YoY, and up 3%/down 35%/28% vs. our estimate) in 3QFY25. Consol. sales volume rose ~17% YoY to 16.5mt (+5% vs. estimate).
*Realization/t declined 11%/1% YoY/QoQ to INR5,153 (2% below estimate). Opex/t was up 2% YoY (+4% vs. our estimate), led by a 6%/3% increase in variable cost/other expenses. However, freight cost/t declined ~7% YoY. EBITDA/t (adj. for prior period inventive income) declined 56% YoY to INR537 and OPM contracted 10.9pp YoY to ~10%.
*In 9MFY25, revenue was flat YoY, while adj. EBITDA/PAT declined 33%/40%. OPM contracted 6.4pp YoY to ~13% and EBITDA/t was down ~39% YoY to INR674. We estimate revenue to grow ~10% YoY in 4QFY25, while EBITDA/ PAT may decline 29%/20%. We estimate volume growth of ~14% YoY, fueled by inorganic expansions, and EBITDA/t of INR633 vs. INR1,025/INR537 in 4QFY24/3QFY25.
Highlights from the management commentary
*Cement demand is likely to grow ~4-5% in FY25, implying a better demand scenario in 2H vs. 1HFY25, driven by improved consumption, greater demand in the housing and infrastructure segments, and increased government spending.
*Price hikes were implemented in mid-Dec’24 and are expected to positively impact 4QFY25. However, cement prices in the South remain more depressed. The company’s exposure in the South region has increased through inorganic expansions.
*Kiln fuel costs stood at INR1.66/Kcal vs. INR1.84/INR1.59 YoY/QoQ. The share of AFR in the fuel mix was at ~8% vs. 9.5% in 2QFY25.
Valuation and view
*Adjusted for one-offs, (prior period incentive incomes and reversal of tax provisions/interests), ACEM reported disappointing numbers in 3QFY25. The company’s EBITDA/t was significantly lower than estimates due to weak realizations, as its exposure in the South region increased through inorganic growth, where pricing remains more depressed. Further opex/t was higher due to increased plant maintenance and other overheads related to the integration of newly acquired assets (Sanghi and Penna Cement). However, management has guided for both these assets to show improvement in performance in FY26.
*We reduce our FY25/26/27E EBITDA by 22%/17%/9% due to lower EBITDA/t assumptions. We also reduce our valuation multiple to 18x EV/EBITDA (vs. 20x earlier), a 10% discount to UTCEM. ACEM (consol.) trades at 20x/15x FY26/FY27E EV/EBITDA. We maintain our BUY rating with a revised TP of INR600 (earlier INR750).
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