Buy Ambuja Cements Ltd For the Target Rs.705 by Axis Securities Ltd
Beat Estimates On Lower Cost; Retain BUY
Est. Vs. Actual for Q2FY26: Revenue – BEAT; EBITDA Margin – BEAT; PAT – BEAT
Change in Estimates post Q2FY26 (Abs.)
FY26E/FY27E: Revenue: -2%/2%; EBITDA: 3%/7%; PAT: 30%/2%
Recommendation Rationale
* Capacity Addition to Support Volume and Revenue Growth: The company is expanding capacity from 107 MTPA (including 8.5 MTPA from Orient Cement) to 118 MTPA by FY26. It now targets 155 MTPA by FY28 (earlier 140 MTPA), supported by incremental expansion and debottlenecking initiatives. With current utilization at 65%, there remains meaningful upside potential as demand strengthens. This enhanced capacity base is expected to underpin sustained growth momentum, with volumes and revenue projected to post a 12% CAGR over FY24–FY27E.
* Operational Efficiency to Drive EBITDA Margin: During the quarter, EBITDA margin improved to 19.2%, supported by stronger realisation, healthy volume growth, and lower YoY operating cost. The company targets reducing its cost of production to Rs 4,000/tonne by FY26, with an additional reduction of Rs 300–400/tonne by FY28 through multiple levers, including lowering clinker factor, optimizing logistics, increasing green power share, driving blended cement mix, and expanding EBITDA margins. We expect margins to improve to 20%–21% by FY27E. Further, the company aims to bring production cost down to Rs 3,650/tonne and deliver EBITDA/tonne of Rs 1,500 by FY28.
* Cement Sector Consolidation Enhances Competitive Advantage for Big Players: Between 2013 and 2024, large players increased their market share from 46% to 57%. By FY27–FY28, this is expected to rise further to 65%–70%. With consolidation accelerating and capacity additions concentrated among top players, market share gains are likely to continue, driving stronger pricing discipline, improved economies of scale, and greater supply chain efficiency. As the 2nd largest player, the company is strategically positioned to benefit from this structural shift over the medium to long term.
Sector Outlook: Positive
Company Outlook & Guidance: The company has guided for double-digit volume growth for FY26. It expects industry demand in FY26 to grow in the range of 7%-8%. Strong infrastructure demand and ongoing needs from the housing and commercial sectors are anticipated to boost cement demand in FY26. Strategic investments in roads, railways, and urban and commercial amenities are poised to drive robust growth.
Current Valuation: 17x FY27 EV/EBITDA (Earlier Valuation: 17x FY27 EV/EBITDA).
Current TP: Rs 705 /share (Earlier TP: Rs 660/share).
Recommendation: We maintain our BUY rating on the stock.
Alternative BUY Ideas from our Sector Coverage: UltraTech Cement Ltd (TP-13,900/share), Dalmia Bharat (TP-2,550/share), ACC Ltd (TP-2,390/share), Shree Cement (TP-Rs 31,655/share).
Financial Performance
ACL reported results ahead of expectations, supported by stronger volumes, better realisation YoY, and lower costs. EBITDA margin improved sharply to 19.2% vs 14.8% YoY (vs expectation of 17%). Revenue grew 22% YoY, led by a 19% rise in volumes to 16.9 MTPA, driven by higher sales under MSA and increased premium product contribution. Blended EBITDA/tonne came in at Rs 1,042, up 33% YoY and above our estimate of Rs 943/tonne. Blended realisation/tonne stood at Rs 5,429, up 3% YoY and down 3% QoQ. Cost/tonne declined 3% YoY and QoQ to Rs 4,387, aided by lower freight cost. Reported PAT surged to Rs 1,766 Cr, up 287% YoY, significantly higher than our estimate of Rs 480 Cr, driven by an IT reversal of Rs 1,697 Cr.
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SEBI Registration number is INZ000161633
