Improving margins likely to help Ambuja Cements emerge as an outlier

Ambuja Cement could increase its EBITDA margin from 13.2% in FY23 to around 19.5% in FY24, with continued gains likely in FY25 and FY26 due to effective cost control and increased scale

The cement industry remains a bit of a puzzle for investors. While demand appears to grow steadily on the back of government infra projects, every company within the sector is actively investing in capital expenditures (capex). This could lead to a persistent supply overhang, potentially triggering a price war.

While demand has been good through the ongoing January-March quarter (Q4) of FY24 so far, with an estimated 10 per cent volume expansion over a weak Q3 of FY24, prices fell through Q4. However, fuel and raw materials costs were low, compensating to some extent.

Among the expansion plans, Ambuja Cements, which is now part of Adani Group, proposes to establish a new cement grinding unit with an investment of Rs 1,000 crore in Jharkhand, with a capacity of 4 million tonnes per annum (MTPA). The project will dispose of fly ash generated from the neighbouring Adani Power plant in Jharkhand. Ambuja already operates two cement plants in Jharkhand with a combined capacity of 6 MTPA.

 

Capacity expansion

Ambuja, with its subsidiaries ACC and Sanghi Industries, has a total capacity of 77.4 million tonnes and it plans to eventually push capacity to 140 MTPA by FY28 with clear plans of 32 MTPA over the next two fiscals. In addition, the company is investing heavily in an energy transition to green power. The green power capacity is slated to rise to 1,466MW by FY28 from 173MW in FY23 and in addition, the Waste Heat Recovery capacity will amount to 375MW by FY28. This energy transition will take around Rs 6,000 crore in capex.

Ambuja’s total capex is expected to be around Rs 25,000 crore. A portion of this is slated to be financed through an equity infusion of roughly Rs 15,000 crore via promoter warrant conversion in April 2024. However, this warrant conversion comes with an equity dilution of about 24 per cent. Analysts estimate that Ambuja will have a surplus of Rs 9,000 crore in free cash by end of FY24 and will remain debt-free. Hence, the capex could be done without financial strain.

 

Margin expansion

The new management has also succeeded in delivering margin expansion by cost control. Ambuja used to have margins which ran at around 400 bps lower than its peers, and this margin gap has more or less been closed. Analysts estimate that FY24 could close with an EBITDA margin of around 19.5 per cent versus 13.2 per cent in FY23. Further margin gains are likely in FY25 and FY26 as scale kicks in.

The capacity growth would be around 14 per cent through FY26, and EBITDA per tonne could rise to Rs 1,226 in FY25 and Rs 1,397 in FY26 versus Rs 758 in FY23. Hence, the scale up could be accompanied by better margins, which makes the company attractive, despite the equity dilution and supply overhang and the highly competitive nature of the cement industry. While return on capital employed (RoCE) will hit around 8.5 per cent in FY24 (up by around 100 bps YoY), it will be maintained in that range until FY26.

Cement prices are poised to remain a concern through the medium term due to surplus supply, until construction works pick up to the extent that the industry expects. However, good cost controls, a national footprint, scale and well-organised logistics are all critical competitive factors, and Ambuja possesses these attributes in addition to a strong balance sheet.