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

Ambuja Cements' (ACEM) various cost optimisation initiatives coupled with MSA synergies with ACC under Mr. Neeraj Akhoury, MD&CEO (also India head, LafargeHolcim) could achieve sustainable cost reduction (at least 15-20% of CY19 EBITDA/te, in our view) over the next few years. Commissioning of 3.1mnte clinkerisation plant at Marwa-Mundwa by H1CY21E would not only lend better volume visibility, but also improve overall profitability. With higher profitability, valuation gap vs peers may narrow. We maintain our CY20E-CY21E EBITDA estimates (~13% ahead of consensus) with the target price unchanged at Rs255/share (10x Mar'22E EV/E). ACEM currently trades at an attractive valuation of 8.3x CY21E EV/E (for consolidated capacity of ~66mnte). Maintain BUY.

- ACEM's cost optimisation initiatives under program 'I can' targets to achieve significant cost savings (at least 15-20% of CY19 EBITDA/te, in our view) via: a) unlocking efficiencies in procurement and supply chain (clinker factor reduction, decrease in spare inventory, source mix optimisation); b) reducing distribution costs (reduction in primary and secondary freight, higher direct despatches, warehousing cost rationalisation); and (c) fixed-cost rationalisation (via renegotiating contracts and curtailing a few expenses). Besides, ACEM plans to set up WHRS plants at Darlaghat and Bhatpara (19.5MW at each location) at a capex of Rs3.8bn by Q4CY21. Subsequently, the company may set up WHRS plants at Maratha and Ambujanagar in addition to solar plants totalling 40MW. Railway sidings project at capex of Rs2.1bn at Rabriyawas, Rajasthan, and underground mining at Gare-Palma coal block (at Rs3.6bn) are expected to be completed over next two years.

- MSA with ACC could gain traction under the leadership of Mr. Neeraj Akhoury, MD&CEO (also India head, LafargeHolcim), and deliver targeted synergies of 3-5% of PBT. ACEM-ACC likely achieved maximum volume swaps and more than doubled synergies during Jun'20 (up from Rs60mn-70mn p.m. during H2CY19) via network optimisation and better realisation, to be shared almost equally.

- North expansion and various cost efficiencies to further aid profitable growth. 3.1mnte clinker line at Marwar Mundwa, Rajasthan, along with 1.8mnte grinding unit is likely to be operational by H1CY21E, in our view. Besides, volumes from this expansion could see quicker ramp-up as it can also be serviced by ACC. This will strengthen ACEM's position in the core markets of North and Gujarat and aid volume growth / profitability from CY21E.

- ACEM currently trades at an attractive valuation of 8.3x CY21E EV/E (>30% discount to 10-year average). Consensus has raised ACEM's CY20E-CY21E EBITDA by ~10% over the past three months and we see upside risk to these estimates. ACEM has net cash of Rs52bn as at Jun'20, which is likely to increase further over CY20-CY22 even after factoring-in capex of Rs26bn.

Shares of AMBUJA CEMENTS LTD. was last trading in BSE at Rs.222 as compared to the previous close of Rs. 220.9. The total number of shares traded during the day was 96959 in over 1328 trades.

The stock hit an intraday high of Rs. 223.55 and intraday low of 220.3. The net turnover during the day was Rs. 21499883.

Source : Equity Bulls

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