Ambuja Cements Ltd.

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Initiating Coverage

Ambuja Cements Ltd. 09-November-2020

Ambuja Cements Ltd.

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Industry LTP Base case Fair

Value Bull case Fair Value

Recommendation Time Horizon

Cement Rs. 248 Rs.251 Rs.276 Buy on dips to Rs.224-228 band and add further on declines to Rs.208-212 band 2 quarters

Our Take:

Ambuja Cements Ltd. is a part of LafargeHolcim group, the 2nd largest cement producer group in the world. Ambuja Cement has 29.65 MTPA installed capacity. It has a pan India presence with ACC + Ambuja Cement combined market share of ~14% in the Indian cement industryAmbuja is in the final phase of setting up greenfield integrated plant with a capacity of 3 MTPA of clinker and 1.8 MTPA of cement grinding at Nagaur, Rajasthan at a capex of Rs.2350 cr. This facility is expected to on steam by Jun-21. Going forward, upcoming expansion in Rajasthan by Q2CY21 is likely to boost volume growth over CY21-23E.

We expect that Covid-19 led lockdown and slowdown in the economy can lead to a decline in volumes and revenue of Ambuja for CY20 (though declines can be lower than peers) but benign raw material price and aggressive control on variable costs are likely to drive EBIDTA growth. The industry has a higher dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy. Going forward, we expect, a gradual recovery in cement demand and volumes are likely to pick-up from Q1CY21 onwards. In the case of Ambuja, incremental volumes from the commencement of additional capacities will result in a lower decline in volumes compared to the industry. This will help to regain lost market share.

Valuations & Recommendation: We expect that the company will get benefit from the strong market share with a pan India presence. Investment in captive power plants, strong balance sheet and strong parentage provides comfort. Covid-19 led lockdown has adversely impacted partly in CY20 with lower utilization, expected shortage of labour, an expectation of sharp fall in real estate and infra development which could lead to 6% CAGR in top-line and 10% EPS CAGR over CY19-22E. Due to its strong position with holding of stake in ACC, the company will command a higher value than average players. Higher profitability to be driven by cost rationalization on the back of MSA (Master supply agreement) with ACC. Strong synergy benefits on cost control is likely sustain healthy operating performance. Strong growth visibility, a robust balance sheet and attractive valuations make Ambuja Cements a preferred stock in the cement sector. We feel investors can buy the shares on dips to Rs.224-228 band and add more on dips to Rs.208-212 band for the base case and bull case fair value shown below over the next two quarters.

HDFC Scrip Code AMBUJAEQNR

BSE Code 500425

NSE Code AMBUJACEM

Bloomberg ACEM:IN

CMP Nov 06, 2020 248

Equity Capital (cr) 397

Face Value (Rs) 2

Eq- Share O/S(cr) 198.56

Market Cap (Rscr) 49244

Book Value (Rs) 116.20

Avg.52 Wk Volume 8345387

52 Week High 265.75

52 Week Low 136.65

Share holding Pattern % (Sept, 2020)

Promoters 63.27

Institutions 30.34

Non Institutions 6.39

Total 100.0

Fundamental Research Analyst Jimit Zaveri Jimit.zaveri@hdfcsec.com

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SOTP Based valuation Base Case Bull Case

Target EV/EBIDTA Multiple (x) 10 11

Target EV (Rs.Cr) 32250 35443

Net Debt/(Cash) (Rs.Cr) (adjusted for dividend of Rs.3375 cr) -3977 -3977

Standalone Value (Rs.Cr) 36227 39420

Standalone Per Share Value (Rs.) 182 199

Value of ACC in Proportionate for Ambuja Cement (Per Share) 69 78

Total Value of Ambuja Cement (Rs.) 251 276

Financial Summary (Standalone)

Particulars (Rs cr) Q3CY20 Q3CY19 YoY-% Q2CY20 QoQ-% CY19 CY20E CY21E CY22E

Total Operating Income 2852 2626 9% 2177 31% 11,667.9 11,267.7 12,728.0 14,070.0

EBITDA 680 440 55% 595 14% 2,154.7 2,651.7 2,925.1 3,193.1

APAT 441 235 88% 453 -3% 1,528.2 1,820.1 1,963.5 2,080.6

Diluted EPS (Rs) 2.22 1.18 88% 2.28 -3% 7.7 9.2 9.9 10.5

RoE-% 7.1 8.6 9.3 9.1

P/E (x) 32.2 27.1 25.1 23.7

EV/EBITDA 21.0 17.1 15.5 14.2 (Source: Company, HDFC sec)

Q3CY20 Result Update

• The volumes of the company have grown by 8% to 5.67 mnT in Q3CY20 compared to 5.26mnT in Q3CY19. Revenue has grown by 9%, y-o-y to Rs.2852 cr in Q3CY20 compared to Rs.2626 cr in Q3CY19. NSR (Rs/T) has grown by 0.80% to Rs.5031/t, Y-o-Y.

• However, with the improved realization and reduction in overall expenditure, the EBIDTA was at Rs.680 crores as compared to Rs.440 crores in the previous year. EBIDTA/T has improved YoY by 43% to Rs.1200/T. This was a 2nd consecutive quarter in row, Ambuja has reported healthy operating performance.

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• Better operating performance was primarily driven by lower Power & fuel cost which fell by 11% to Rs.1014/T compared to Rs.1139/T in the previous year. Raw Material cost declined by 21% to Rs.382/T compared to Rs.485/T in the previous year. Raw Material costs decreased YoY mainly due to reduction in rate of Fly & Gypsum through new usage norms (wet fly ash) and negotiations. Freight & Forwarding cost grew by 1% to Rs.1306/T compared to Rs.1292/T in the previous year.

• The board has also announced an interim dividend of Rs17/share (record date Nov 06, 2020) which translates into 60% of its cash balance and a pre-tax dividend yield of 7%. This declaration denotes a change in management intent towards a leaner balance sheet and growth, both of which can lead to rerating of the stock.

Long term Triggers A strong market position with a decent market share

Ambuja Cement has 29.65MTPA installed capacity. Its capacity spread across North and Central (40%), West and South (37%), and East (23%)

India. The company has a pan-India presence with 48000+ dealers and retailers. Combined entity (ACC + Ambuja) has 14% market share in

the Indian cement industry. Ambuja Cement has a market share of ~17% in the northern region, ~12% in the eastern region and ~24% in the

western region. Its nationwide presence shields operations from regional price volatility and demand-supply imbalances.

Ambuja has been involved in developing low carbon products and first Indian cement company to adopt environmental products. The

company has launched 14 new products in CY19 which includes 8 types of RMX – RoofCrete, SuperCrete, FibreCrete, ColumnCrete,

FoundationCrete, FibrePlast, Plazto, BagCrete; 5 décor leakage-proofing and tile adhesive application-based solution products – Ambuja

Tilocol VT, Ambuja Tilocol MT, Ambuja Tilocol ST, Ambuja SeelanSeal, Ambuja ColorSave Wall Putty and 1 PPC cement product Ambuja

Kawach.

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Source – Company, HDFC sec Research

Robust financials Ambuja Cement has a debt-free balance sheet with strong cash position on balance sheet despite on-going capex. Also, it has a strong cash flow from operating activities. This helps Ambuja Cement to survive during tough times. A strong balance sheet helps with improving depreciation coverage. Working capital days expected to remain stable which will again help to the company to maintain balance sheet strength.

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Source – Company, HDFC sec Research

Working on improvement of operating efficiency and expansion plan

The company is working on identifying new sources of materials and alternative low-cost materials. Power and fuel costs constitute ~25%

of total costs. The company consumed ~68% of the total power requirement from captive sources and increases usage of Waste Heat

Recovery System. Logistics costs, the biggest cost for cement industry, has also dropped as the Railways have extended the benefit of

exemption from busy season surcharge. For strengthening of logistics capabilities, the company has a project at Rajasthan at a cost of Rs.210

cr which is expected to be completed by end of CY20.

Source – Company, HDFC sec Research

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The company is setting up greenfield integrated plant with a capacity of 3 MTPA of clinker and 1.8 MTPA of cement grinding at Nagaur,

Rajasthan with an investment worth of Rs.2350 cr. It is expected to get commissioned in the June-2021. Ambuja has acquired mining lease

at Maldi-Mopar for support Bhatapara plant, at Loadhva to support Gujarat plant and at Nandgaon Ekodi to support Chandrapur,

Maharashtra plant.

The company has acquired a coal block at Gare-Palma sector IV/8 in Chhattisgarh through e-auction. Expected investment is worth of ~Rs.363

cr. Also, the company has the plan to set up 19.5 MW each of the Waste Heat Recovery plant at Darlaghat (HP)and Bhatapara (Chhattisgarh)

with an expected cost of ~Rs.378 cr. This plant is expected to be functional between end of CY20 to Q1CY21.

It also intends to set up WHRS at Maratha (Maharashtra) and Ambujanagar (Gujarat) plants in future.

Management change

Ambuja Cement and ACC have entered into a Master Supply Agreement (MSA) with each other with the aims of increasing synergies,

reducing operational costs and increasing the companies' joint sustainability. This agreement is for the supply of cement, clinker, raw

materials (including fuel, fly ash, slag, gypsum etc.), spare parts and for providing toll grinding services at certain plants. This will be executed

through purchase orders, subject to a pricing formula. This will enable each company to optimise the cost of servicing markets by using each

other's plant's capabilities, maximise the utilisation of assets to generate additional sales for each company and make the best use of their

joint spare inventory.

Ambuja Cement has recently appointed Mr Neeraj Akhoury as the MD and CEO. Mr Akhoury was earlier the MD and CEO of Ambuja's

subsidiary – ACC, where he has worked on market share as well as implementing strong cost control. Lafarge Holcim group has also appointed

to Mr.Akhoury as the India CEO of Lafarge Holcim and a Non-Executive Director on the board of ACC. This move should help in better strategic

alignment between Ambuja and its subsidiary ACC and help unlock benefits under the Master Supply Agreement (MSA) between the two

companies.

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Strong pricing though slower demand

The cement industry has witnessed strong pricing M-o-M and Y-o-Y which is expected to improve realization and profitability. The sharp

price hike taken in late April sustained in subsequent months. Faster traction in rural/semi-urban cement demand (before monsoon hits)

came to the rescue of the industry. Strong prices and lower costs could improve profitability in FY21.

Source – Company, HDFC sec Research

What could go wrong

Covid-19 led lockdown and slowdown in the economy affect future growth

It is expected that cement demand will fall sharply in FY21E . A decline in cement demand in FY21 will bring down capacity utilization of

cement companies. Growth in the housing segment, that forms 60%-65% of cement demand, is likely to be affected given the impact of the

slowdown in economic growth as lower income growth and income cuts will result on lower discretionary spending over the next year.

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Source – Company, HDFC sec Research

Majority of the construction labour have returned to their homes and are reluctantly returning to join work even after the state-wise lifting

of lockdown. Reduced availability of truck drivers is impacting inward and outward logistics.

The COVID-19 induced self-isolation impaired the home buying sentiments that has created an adverse impact on weak balance sheet

builders and they tend to defer launches of new projects.

Fall in volumes will result in lower capacity utilization resulting in lower operating leverage.

Prolonged deterioration of core economy sectors can result in slowdown in cement demand which can result in lower volume offtake and

lower cement prices. Cement industry is a highly fixed cost intensive business. Any slowdown in demand can result in negative operating

leverage which can impact the overall profitability of the company.

Any spike in key raw materials can result in higher input cost which can impact earnings.

Delay in commissioning of new greenfield facility in Rajasthan can result in lower than expected earnings growth in CY21 and beyond.

Ambuja Cements Ltd.

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About the Company

Ambuja Cements Ltd, a part of the global conglomerate LafargeHolcim. It was founded in 1983 by Narotam Sekhsaria and Suresh Neotia. In

January 2006, Holcim Ltd (Holcim) acquired 14.8% of Ambuja Cements' equity shares. Following an open offer in April 2006, Holcim assumed

management control of the company. Globally, Holcim and Lafarge SA announced their merger in April 2014. Completed in July 2015, the

merged entity was renamed LafargeHolcim. Post the proposed restructuring between ACC and Ambuja Cements becoming effective from

August 12, 2016, ACC has become a subsidiary of Ambuja Cements.

Ambuja Cement has a cement capacity of 29.65 million tonnes with five integrated cement manufacturing plants and eight cement grinding

units across the country.

Ambuja Cements holds a 50.05% stake in ACC, while Lafarge holds 4.48% through Holderind Investments. LafargeHolcim holds 63.62% in Ambuja Cements through Holderind Investments. Brands

Source – Company, HDFC sec Research

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Industry India is the second-largest cement producer in world. The cement industry occupies an important place in the Indian economy because of

its strong linkages with other sectors such as construction, transportation, coal and power. The sector notably plays a critical role in the

economic growth of the country, in its journey towards inclusive and decidedly conclusive growth. The construction sector alone constitutes

about 7 per cent of the country's gross domestic product (GDP). India is the second-largest producer of cement in the world after China,

with an installed capacity of ~509 MTPA. Presently, the Indian cement industry has 225 plants, owned by 65 players.

Lower per capita cement consumption in India

Source – Statista, Shree Cement earning presentation, HDFC sec Research

Although India is among the leading producers of cement in the world, its per capita cement consumption is at 200-250 kg, which is lowest among the developing countries. The world average is 500-580 kg, while countries such as China have a per capita cement consumption of 1650-1750 kg, followed by Vietnam (800-850 kg) and Turkey (700-750 kg). The factors that could trigger cement sales are infrastructural demand especially for Government projects, as well as higher housing demand in rural and semi-urban areas. A higher realization and rising dispatches are considered to be conducive for higher profits for the cement industry. All efforts are targeted to increase sales and reach the premium segment in prices.

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The government also intends to expand the capacity of the railways and the facilities for handling and storage to ease the transportation of cement and reduce transportation costs. The demand for the cement industry is expected to reach 550-600 million tonnes per annum by 2025 because of the expanding demand of different end users i.e. housing, commercial construction and industrial construction. Government thrust on affordable housing for realizing its vision of “Housing for All” by 2022 and Smart City program should also help in demand growth for cement. The rate of new cement capacity additions has also slowed down considerably. Therefore, the outlook for the cement sector looks better.

Cement, being a bulk commodity, is a freight intensive industry and long-distance transportation can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. Cement is relatively a highly concentrated industry in India: I) the top 10 companies constitute> 60% of the market; ii) the top 5 companies enjoy a market share of around > 48%, and iii) the top 2 cement groups (Lafarge Holcim and Aditya Birla Group) enjoy a market share of around 38%.

Peer Comparison as per FY20 Financial

Company CMP (As on 7-11-

2020) Mcap (Rs. Cr.)

Capacity (MTPA)

OPM% NPM% RoE% RoCE% D/E(x) P/E (x) EV/T ($) EBIDTA/T

(Rs.)

Ambuja Cement 248 49244 29.7 17 8 9 17 0.0 17 178 897

ACC 1652 31055 33.4 15 9 12 17 0.0 25 107 781

Dalmia Bharat 893 17414 26.5 22 2 2 5 0.5 36 105 1091

Shree Cement 22053 79611 40.4 29 12 13 16 0.2 53 275 1458

The Ramco Cement 836 19701 16.5 21 11 12 13 0.6 33 181 981

Ultratech Cement 4556 131486 114.8 22 9 12 14 0.7 21 178 1141

India Cements 121 3751 15.6 12 1 1 4 0.7 44 57 530

Company Regions wise Presence

North West South East Central

Ambuja Cement Y Y Y Y Y

The Ramco Cement Y Y

Ultratech Cement Y Y Y Y Y

ACC Y Y Y Y Y

Dalmia Bharat Y Y Y

Shree Cement Y Y Y Y

India Cements Y Y

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Financials Income Statement Balance Sheet

(Rs Cr) CY18 CY19 CY20E CY21E CY22E As at March CY18 CY19 CY20E CY21E CY22E

Net Revenue 11357 11668 11268 12728 14070 SOURCE OF FUNDS

Growth (%) 8.6 2.7 -3.4 13.0 10.5 Share Capital 397.1 397.1 397.1 397.1 397.1

Operating Expenses 9668 9513 8616 9803 10877 Reserves 20615 21808 19955 21322 22807

EBITDA 1689 2155 2652 2925 3193 Minority Interest 0 0 0 0 0

Growth (%) -10.1 27.6 21.0 10.3 9.2 Other Equity & Liabilities 0 0 0 0 0

EBITDA Margin (%) 14.9 18.5 23.5 23.0 22.7 Shareholders' Funds 21013 22205 20352 21720 23205

Other Income 375.0 426.5 450.0 480.0 520.0 Long Term Debt 40 35 35 35 35

Depreciation 548.1 543.8 612.1 689.1 751.2 Long Term Provisions & Others 419 303 319 339 364

EBIT 1516 2037 2490 2716 2962 Total Source of Funds 21471 22543 20706 22094 23604

Interest 82.3 83.5 90.0 98.0 187.3 APPLICATION OF FUNDS

Shares of Profit in Joint Ventures (net of Tax) 0.0 -6.2 0.0 0.0 0.0 Net Block 6274 6921 7030 7339 8047

PBT 1433 1948 2400 2618 2775 Non-Current Investments 11814 11789 12143 12264 12264

Tax 19.1 419.5 579.5 654.5 693.9 Deferred Tax Assets (net) 0 0 0 0 0

RPAT 1414 1528 1820 1963 2081 Long Term Loans & Advances 1359 1432 1494 1730 2051

Minority Int. 0 0 0 0 0 Other Assets 0 0 0 0 0

APAT 1414.1 1528.2 1820.1 1963.5 2080.6 Total Non Current Assets 19446 20143 20666 21332 22363

Growth (%) 19.2 15.3 15.8 7.9 6.0 Current Investments 0 0 0 0 0

EPS 7.1 7.7 9.2 9.9 10.5 Inventories 1278 954 1050 1220 1426

Trade Receivables 470 513 463 506 578

Short term Loans & Advances 412 434 464 534 614

Cash & Equivalents 3330 4694 3495 3544 4143

Other Current Assets 251 253 271 311 358

Total Current Assets 5740 6848 5743 6116 7119

Short-Term Borrowings 0 0 965 145 130

Trade Payables 1109 936 850 967 1073

Other Current Liab & Provisions 1910 2520 2847 3118 3461

Short-Term Provisions 696 992 1041 1124 1214

Total Current Liabilities 3715 4447 5703 5354 5878

Net Current Assets 2025 2401 40 762 1241

Total Application of Funds 21471 22543 20706 22094 23604

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Cash Flow Statement Key Ratios (Rs Cr) CY18 CY19 CY20E CY21E CY22E (Rs Cr) CY18 CY19 CY20E CY21E CY22E

Reported PBT 1,433 1,991 2,400 2,618 2,775 Profitability (%)

Non-operating & EO items -375 -427 -450 -480 -520 EBITDA Margin 14.9 18.8 23.5 23.0 22.7

Interest Expenses 82 84 90 98 187 EBIT Margin 13.3 17.8 22.1 21.3 21.1

Depreciation 548 544 612 689 751 APAT Margin 12.5 13.5 16.2 15.4 14.8

Working Capital Change -809 988 1,163 -673 119 RoE 6.9 7.3 8.6 9.3 9.3

Tax Paid -19 -419 -579 -654 -694 RoCE 7.1 9.2 12.0 12.3 12.5

OPERATING CASH FLOW ( a ) 861 2,760 3,235 1,597 2,618 Solvency Ratio

Capex -681 -1,189 -721 -998 -1,460 D/E 0.0 0.0 0.0 0.0 0.0

Free Cash Flow 180 1,571 2,514 600 1,158 Interest Coverage 18.4 24.8 27.7 27.7 15.8

Investments -176 -49 -415 -357 -321 PER SHARE DATA

Non-operating income 375 427 450 480 520 EPS 7.1 7.9 9.2 9.9 10.5

INVESTING CASH FLOW ( b ) -482 -811 -686 -875 -1,261 CEPS 9.9 10.7 12.2 13.4 14.3

Debt Issuance / (Repaid) -68 -121 16 20 25 BV 106 112 102 109 117

Interest Expenses -82 -84 -90 -98 -187 Dividend 2.0 1.5 18.5 3.0 3.0

FCFE 29 1,367 2,440 522 996 Turnover Ratios (days)

Share Capital Issuance 0 0 0 0 0 Debtor days 15 16 15 15 15

Dividend -397 -303 -3,673 -596 -596 Inventory days 37 35 34 35 37

FINANCING CASH FLOW ( c ) -547 -507 -3,747 -674 -758 Creditors days 41 39 36 36 36

NET CASH FLOW (a+b+c) -169 1,442 -1,198 49 599 Working Capital Days 12 12 13 14 16

VALUATION

P/E 34.8 31.3 27.1 25.1 23.7

P/BV 2.3 2.2 2.4 2.3 2.1

EV/EBITDA 26.8 20.7 17.1 15.5 14.2

Dividend Yield 0.8 0.6 7.5 1.2 1.2

Dividend Payout 4.5 19.0 201.8 30.3 28.6 Source: Company, HDFC sec Research

One Year Price Chart

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