Analysis: Improvement in realisation key for ACC and Ambuja

For Holcim Group companies – ACC and Ambuja Cements – volume growth in 2012 remained below the industry average and analysts do not expect much change in the situation in 2013 as well, as the benefit of capacity expansion will take some time to accrue.
 
Though ACC still has some leg room for growth as its capacities in the South (last capacity addition at Wadi in Karnataka) may help spur volumes if the region sees recovery in demand, for Ambuja that option is limited since it is a regional player. Hence, the realisations will be important in driving profitability for both the players.

 
Official figures put the volume growth in calendar year 2012 at 1.69% for ACC and 2.5% for Ambuja – well below the industry average of 6.5%. While ACC clocked in volumes of 24.1 million tonnes (MT) in CY12 compared to 23.7% in the previous year, Ambuja’s volume at 22 MT was only marginally higher than 21.5 MT recorded in CY11.
 

The last financial year (both companies follow January – December) saw an improvement in realisation push the profitability (EBIDTA per tonne) despite rising raw material costs of fly ash, gypsum and slag. Power costs, too, increased on the back of higher grid costs as diesel price hikes and a rise in rail freight rates. Thus, costs per tonne for ACC and Ambuja grew by 9% and 8%, respectively. In comparison, the realisation growth of 10 – 11% was much better and drove the profitability. Thus, EBIDTA per tonne at Rs 1,101 increased 25% year-on-year (y-o-y) for Ambuja and 9% for ACC to Rs 815.

 
CAPEX PLANS
 
Looking at the demand scenario as well as the capacity expansion schedule, the volume growth in CY13 may still not be phenomenal, analysts say. ACC, with the current capacity of 30 million tonnes per annum, is expanding its capacity by 5MTPA which is likely to be completed by 2015. The project comprises of a new clinker unit of 2.79 MT and three separate grinding units.
 
For Ambuja, while the brown-field expansion of 0.8 MT is progressing in West Bengal, the proposed integrated cement plant that will increase its capacity by 4.5 MT will take time to complete, as land acquisition has just started. Thus, the volume growth may not be driven by capacity expansions and hence an improvement in realisation holds key for both these companies.

 
OUTLOOK AND VALUATION
 
“Our recent channel checks suggest improvement in cement prices across regions (excluding AP and Gujarat),” suggest analysts at Spark Capital. With demand expected to improve over the next 12 – 18 months and limited fresh capacity additions (for industry as a whole), they expect pricing power to sustain.
 
They maintain in BUY on both ACC and Ambuja Cement with target price of Rs 1,450 (8.5x CY14E EV/EBITDA) and Rs 215 (9x CY14E EV/EBITDA). Stocks currently trade at Rs 1140 and Rs 175 levels.
 
“We prefer ACC on high profit sensitivity to price and volumes, with low exposure to West and Central India. ACC is trading at a discount to peers despite high returns and comparable EPS CAGR,” said a Credit Suisse note dated March 13.