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Ambuja Cements: On a strong foundation

Improving realisations, healthy demand and better capacity utilisation will aid growth over the next two years

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Continuing its strong run, the stock rose to a 52-week high on Tuesday, outperforming its peers. Despite a brief pause after the production and dispatch numbers for August were announced (which were slightly subdued for the entire industry), analysts expect the momentum in volumes to continue after the monsoon.

Realisations, too, are likely to remain firm for Ambuja, which has strong presence in north and west India. Unlike the south, these regions have not seen price corrections. Experts say considering elections are due in many states (Gujarat, Rajasthan and Madhya Pradesh), this region is likely to see strong demand. Capacity addition in western regions over the next three years is not expected to be high and this is likely to result in healthy utilisations levels. With all growth drivers in place and realisations likely to remain firm, the stock is expected to sustain its high valuations and see further upsides, given the target price range of Rs 210-220.

Firm realisations
Cement prices have remained strong and though there were apprehensions the Competition Commission of India's (CCI) recommendations would affect realisations, this was not the case. Though had brought out a report that proposed penalties on many leading players, analysts felt it wasn't strong and could be contested.

In Rs crore CY12E CY13E CY14E
Net sales 9,992 11,283 12,599
% change y-o-y 17.1 12.9 11.7
Ebitda 2,441 2,756 3,031
Ebitda (%) 24.4 24.4 24.1
Net profit 1498 1,752 1,983
% change y-o-y 22.1 17.6 13.2
EPS (Rs) 9.6 11.6 13.0
PE (x) 20.1 16.6 14.8
E: Estimates   Consolidated financials                                          Source:Bloomberg

Most cement stocks had corrected in anticipation of the report. However, after the report was released, these stocks rebounded. Nevertheless, any outcome on this front remains a risk. Cement prices have remained healthy and in the quarter ended June, the performance of leading players, including Ambuja Cements, was led by strong realisations.

While prices saw correction after the onset of the monsoon, analysts feel this is a temporary phenomenon. As on September 11, average prices across the country in the current quarter stand at Rs 286 per 50-kg bag, an annual rise of 30 per cent, according to an ICICI Securities report. This means realisations would continue to drive revenues for most in the quarter ending September. Analysts feel as long as realisations are healthy, cement stocks would continue their upward trend and sustain valuations.

For Ambuja, given the north, west and central parts are seeing a lower price correction (compared to the South, especially Andhra Pradesh) and realisations would remain stable. In a recent report, JP Morgan analysts stated prices in north India had dropped two to six per cent over the last month.

The decline in Andhra Pradesh, however, was sharper, with prices falling 15-20 per cent (Rs 40-45 per bag), compared to prices in July. Prices in Mumbai did not see a major change, while in Ahmedabad, these rose 2.6 per cent to Rs 316 a bag. Companies predominantly present in west, north and central India, including Ambuja, therefore, have an edge.

Strong demand outlook
Standard Chartered Research analysts say Ambuja's primary areas of operations---western and northern regions, with FY12 growth of 12 per cent and 10.5 per cent, respectively (the average for the country was 6.6 per cent), would drive the company's growth, as well as capacity utilisation.

Also, in the FY12-FY15 period, the western region is adding effective capacity of four million tonnes per annum (mtpa), against FY12 consumption of 47 mt, while the northern region is adding effective capacity of nine mtpa (FY12 consumption of 45 mt). This indicates high capacity utilisation for companies.

Profitability to sustain
Now, costs for all producers are stabilising. Analysts at Emkay Global say even a moderate rise in prices after the season would serve to offset the impact of the recent diesel price increase.

Firm realisations and the ability to pass on costs saw Ambuja Cements record good profitability. The company's earnings before interest, tax, depreciation and amortisation per tonne stood at about Rs 1,200 for two consecutive quarters. Profitability is likely to remain high, owing to strong limestone reserves, captive power plants, coal linkages, etc.

Analysts at Motilal Oswal Securities say Ambuja Cements expects eight to nine per cent per cent volume growth this year (base case). The boost in infrastructure spending, given the demand before elections, has the potential to boost growth to about 9.5 per cent. They add the company's dispatch growth over the next two to three years would be driven by de-bottlenecking and capacity addition of three mtpa (2.2 mt integrated greenfield clinker capacity and 0.8 mt of grinding units).

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