Ambuja Cements - Improving margins to narrow valuations gap - ICICI Securities

Ambuja Cements' (ACEM) Q2CY20 standalone EBITDA at Rs6bn (down 15% YoY) was significantly higher than our / consensus estimates of Rs4.5bn. This was mainly led by strict costs control (costs/te down 3% YoY) and higher realisation (up 3% YoY). EBITDA/te rose sharply 19% YoY to life-time high of Rs1,421/te - amongst highest in larger peers. This is the second consecutive quarter of sharp improvement in ACEM's overall execution in terms of growth and profitability under the new leadership team (MD & CEO Mr Neeraj Akhoury and CFO Ms Sonal Shrivastava). Accordingly, ACEM's valuation gap with larger peers may narrow, in our view. Factoring-in better margin, we increase our CY20E-CY21E EBITDA by 18-27%, raise our target multiple from 9x to 10x EV/E and raise our target price to Rs255/share (earlier: Rs210) based on 10x Mar'22E EV/E. Maintain BUY.

- Standalone revenue declined 26% YoY to Rs21.5bn. Realisation increase of 7% QoQ (3% YoY) to Rs5,119/te was higher than our estimate of 5.5% QoQ increase. Volumes declined 29% YoY to 4.2mnte, in-line with our estimates, owing to complete lockdown in Apr'20. Management expects government's increased thrust on affordable housing and infrastructure coupled with improved rural housing demand to drive cement demand in the near-term. Other operating income declined 52% YoY to Rs318mn on expiry of major incentives.

- Standalone EBITDA/te increased 19% YoY/ 36% QoQ to Rs1,421/te (I-Sec: Rs1,073/te). Total cost/te declined 3% YoY/ 2% QoQ owing to strict costs control and various operational efficiencies. Raw material plus power & fuel cost/te (including inventory adjustment) stood broadly flat YoY; though increased 10% QoQ. Freight cost/te declined 6% YoY/ 5% QoQ led by re-negotiation of contracts, logistics efficiencies and network optimisation due to acceleration in MSA with ACC. Other expenses/te declined sharply by 16% YoY and 21% QoQ on stricter control in discretionary fixed cost, negotiations-led savings and rationalisation of various cost items. Some of these cost saving measures may be structural, in our view.

- North expansion and various cost efficiencies to further aid profitable growth. 3.1mnte clinker line at Marwar Mundwa alongwith 1.8mnte GU and WHRS is likely to be operational by Q1CY21E, in our view. This will strengthen ACEM's position in the core markets of North and Gujarat and aid volume growth / profitability from CY21E. Besides, ACEM plans to improve cost structure further by investing in 79MW WHRS / solar plants at various locations, railway sidings at Rabriyawas, Rajasthan and operationalising domestic Gare-Palma coal block over next two years.

- PAT grew 10% YoY to Rs4.5bn including ACC's dividend of Rs1.3bn in Q2CY20. FCF increased 83% YoY to Rs10.3bn on improved profitability and better working capital management (down by Rs2.8bn YoY). ACEM has net cash of Rs52bn as of Jun'20, which may further increase even after factoring-in capex of Rs26bn over CY20E-CY21E. Valuation at <8xCY21E EV/E is attractive, in our view.

Shares of AMBUJA CEMENTS LTD. was last trading in BSE at Rs.206.95 as compared to the previous close of Rs. 201. The total number of shares traded during the day was 644084 in over 8662 trades.

The stock hit an intraday high of Rs. 208.8 and intraday low of 202.05. The net turnover during the day was Rs. 132711925.

Source : Equity Bulls

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