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Potential to deliver strong growth; valuation attractive

* Ambuja Cement (ACEM) has corrected ~30% in the last 4-5 months amid concerns of a demand slowdown in the sector, persistent pricing pressure across markets, and allegations by the US Department of Justice and US SEC on directors of Adani group. Adani group has denied the allegations and termed them baseless.

* In Jan’23, ACEM stock had corrected ~40% in one month after a Hindenburg research report alleged Adani group companies of irregularities. However, the stock subsequently had appreciated by 90%+ between Feb’23 and Jul‘24.

* Setting aside the current development on the Adani group, we believe ACEM, the second largest player in the Indian cement industry, has potential to deliver strong earnings growth, led by capacity expansions and cost-saving initiatives. The company is committed to increasing its capacity to 140mtpa by FY28E through organic and inorganic expansions. Further, it is working on improving cost efficiencies and targeting cost savings of INR530/t by FY28E.

* We estimate ACEM to deliver a CAGR of 12%/16% in consol. revenue/EBITDA over FY24-27. We estimate a 13% CAGR in consol. volume, aided by capacity expansions. Further, we estimate EBITDA/t to increase to INR1,160 by FY27 from INR870 in FY25E. Moreover, after the recent correction, the stock is trading attractively at 16x/13x FY26E/FY27E EV/EBITDA and USD140/USD130 EV/t. We maintain our constructive view on the company given its valueaccretive acquisitions, increasing scale of operation, balanced capacity mix across markets, and cost-saving initiates. We value ACEM at 20x Sep’26E EV/EBITDA to arrive at our TP of INR710.

Committed to reaching capacity target of 140mtpa by FY28E

* Following Adani’s acquisition of ACEM in Sep’22, the new promoter plans to double the company’s consolidated capacity to 140mtpa over the next five years. The promoter with a clear intent of capacity expansion and growth in the cement business infused funds of INR200b. The fund infusion has helped the company to grow inorganically in the initial phase, and reach closer to its capacity expansion target in a short span of time.

* Over the last 18 months, the company announced five small and large acquisitions. ACEM completed the acquisition of 19.1mtpa grinding capacity. Its recent acquisition of Orient Cement with grinding capacity of 8.5mtpa is pending for regulatory approvals. After the completion of this acquisition, the company’s grinding capacity will increase to 97.5mtpa. Besides, ACEM’s organic brownfield expansions of 6.4mtpa grinding capacity is expected to be completed by FY25-end. Hence, ACEM’s consolidated grinding capacity is estimated to increase to 103.5mtpa by FY25-end vs. 67.6mtpa operational at the time of acquisition (Sep’22).

* In its next phase of expansions, ACEM plans to commission 14.6mtpa grinding capacity during FY26, for which work is under progress at multiple locations. The company has also identified 14 additional grinding unit projects for which land acquisition and statutory approvals are under progress. It targets to increase its total grinding capacity to 118.1mtpa by FY26-end and 140mtpa byFY28-end. Further, the cement companies it acquired have potential to expand capacities given the availability of resources (such as land, limestone reserve etc.), which ensure long-term growth opportunities for the company.

Unlocking efficiency in operations and maximizing profitability

* The company remains focused on improving operations efficiencies and reducing costs. Key cost-reduction drivers would be: 1) long term tie-ups for sourcing major raw materials; 2) increasing WHRS and other renewable power share; 3) increase in AFR’s share in the fuel mix; 4) increase captive coal supplies and reduce buying of imported petcoke; 5) optimization of rail-road mix and reduce lead distance, optimization of warehouses and increase direct dispatches; and 6) controlling fixed overheads. With these initiatives the company targets total cost savings of INR530/t by FY28 (achieved INR150/t so far).

* The company is committed to investing INR100b in green power projects. It aims to increase WHRS/solar & wind capacity to 376MW/1GW by FY28 and renewable power share to 60% for the planned capacity of 140mtpa (vs. ~18% currently). The company expects savings in power costs by INR90/t by FY28. Recently, it started power generation from a 200MW solar power plant at Khavda, Gujarat. It is also focusing on increasing AFR to reduce costs and carbon footprints. It installed AFR preprocessing and feeding systems and implemented a gas bypass system to improve the utilization of AFR. ACEM achieved a TSR of 9.5% and targets to increase it to 27.0% by FY30.

* ACEM is working on improving its cost structure and reducing the cost gap with the leading players in the industry. Further, higher capacity expansion will help it to gain market share. ACEM’s targets to increase its market share from ~15% currently to ~20% by FY28E. We estimate ACEM to deliver a CAGR of ~12%/16% in consol. revenue/EBITDA over FY24-27. Further, we estimate EBITDA/t to increase to INR1,160 by FY27 from INR870 in FY25E.

Valuation and view: Strong balance sheet, valuation attractive; retain BUY

* ACEM has a net cash balance of INR101.4b as of Sep’24. Considering cash outflow of INR59b for the acquisition of Orient Cement (including proposed open offer), ACEM is estimated to remain a net cash positive company. We estimate the company to generate sufficient operating cash flows to fund its future organic expansions.

* 1HFY25 was a challenging period due to a demand slowdown and persistent pricing pressure. However, pent-up demand, a pick-up in construction activities, and infrastructure projects after the festive period should lead to demand recovery going forward. Further, strong demand is estimated to drive price growth for the industry. We believe ACEM, with a pan-India presence, should benefit from a recovery in cement demand, prices and cost-saving initiatives. The stock is trading attractively at 16x/13x FY26E/FY27E EV/EBITDA and USD140 /USD130 EV/t. We value ACEM at 20.0x Sep’26E EV/EBITDA to arrive at our TP of INR710. Reiterate BUY.

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