Lack of capacity addition may restrict Ambuja Cements' growth

Angel Broking downgrades its rating on Ambuja Cements to 'neutral' from 'buy'

Ambuja Cements' growth is likely to be constrained in calendar years 2014 and 2015 if the company fails to add adequate production capacity, analysts said.

"The existing clinker capacity of 16.5 mt is only sufficient for annual cement production of 24 mt, which is a 9% growth over calendar year 2012. Its new capacity of 4.5 mt is expected only in calendar year 2015. While it would de-bottleneck capacities to meet growth, any higher than the estimated 8% CAGR (compound annual growth rate), would restrict Ambuja Cements' growth in calendar years 2014 and 2015," Jinesh Gandhi and Sandipan Pal, analysts with Angel Broking, said in a note to clients.

The brokerage also expects the cement maker's profitability edge over its rivals to dilute in coming quarters due to limited scope of further improvement in operating leverage and higher royalty payments to Holcim. Gradual reduction in subsidies and capacity constraint also pose risk to the company's profitability.

Angel Broking has downgraded its rating on Ambuja Cements to 'neutral' from 'buy'.

"We downgrade the stock to factor the risk of further increase in royalty, potentially slower-than-industry growth in calendar year 2015 and gradual reduction in subsidies. Our target price is Rs 202," the analysts said.

At 12:02 pm, Ambuja Cements' shares were traded at Rs 196.50 on the National Stock Exchange (NSE), down 0.4% from previous close.