Ambuja Cements Q2 Review: Valuations, Lag In Price Hikes Limit Upside, Say Analysts

Shares of Ambuja Cements Ltd. fell as analysts maintained their neutral calls on the company citing a lag in passing on costs to consumers in the second quarter and expensive valuations.

The cement maker, which the Adani Group is in the process of acquiring along with ACC Ltd., posted a net profit of Rs 752 crore, down 14% from the same period last year.

Key Highlights (YoY, Consolidated)

• Net sales up 15% at Rs 7,943 crore

• Ebitda down 39% at Rs 1,115 crore

• Ebitda margin at 14% versus 26.5%

The April to June quarter was impacted by rising fuel prices and related inflationary impacts, Neeraj Akhoury, chief executive officer at Holcim India and managing director and chief executive officer at Ambuja Cements Ltd., said.

In its outlook, the company said investment activity is going to be aided by "improving capacity utilisation, the government's capex push, and strengthening bank credit," all of which bode well for cement demand.

"Further, rural consumption should benefit from a normal monsoon owing to improvement in agricultural prospect."

Akhoury said expansion projects of 85 lakh tonnes of cement capacity at Ropar and Bhatapara are "on track". "The ongoing waste heat recovery projects of 53 MW are to be commissioned in the third quarter of 2022, which will support our efficiency initiatives."

Shares of the company fell as much as 1.2% intraday, before closing 0.97% lower on Wednesday. Of the 48 analysts tracking the company, 22 maintain 'buy', 14 suggest 'hold' and 12 recommend 'sell'. The overall consensus price of analysts tracked by Bloomberg implies an upside of 2.9%.

Here's what brokerages made of Ambuja Cement's Q2:

• Maintains 'neutral' stance on the stock with a target price of Rs 350, implying a potential downside of 6%.

• Operational expenditure rose led by an increase in variable costs and other expenses such as higher coal and petcoke prices and inflationary impact.

• Ambuja is well-placed to pursue growth opportunities with a net cash of Rs 4,340 crore in CY23. Historically, Ambuja has been a laggard in capacity expansion v/s other relevant players in the industry. During FY08-22, it reported a grinding capacity CAGR of 3% versus 9-18% for other major players.

• Timely completion of growth plans and cost-saving strategies by the new management will be the key triggers for the stock’s performance. Expects savings of Rs 100 per tonne from technology and know-how fees being paid to Holcim and incremental green energy share (of 18% in CY23E v/s 4% in CY21).

• Largely maintain our CY22/CY23 earnings estimates. Valuation at 15.2x CY23 EV-to-Ebitda ratio appear expensive.

• Recent outperformance of the stock has been supported by ongoing corporate action (acquisition of Holcim’s stake in Ambuja by the Adani Group and will be followed by an open offer).

• Maintains 'hold' rating on the stock with a target price of Rs 400, implying a potential upside of 7.9%.

• Ambuja reported marginally lower-than-expected decline in Ebitda on lower cost increases.

• Given high utilisation and slower capacity adds in near term, Ambuja may now underperform industry growth in CY23.

• While energy cost rally has paused for the past 1-2 months, cement prices continue to lag in catching up with the elevated costs.

• While cement prices in northern and eastern region increased sharply (totaling to ~60% of volume share for Ambuja), western region prices were largely stable as per our channel checks. Attributes lower than estimated realisation growth for the quarter to volume focus by Ambuja.

• While cost rally has paused for the past 2 months, cement industry pricing is yet to catch up with cost increase. Cut CY22/CY23 Ebitda estimates by 7%/3% to reflect this lag.
  

• Maintains 'hold' rating on the stock with a target price of Rs 350 (earlier Rs 360), implying a potential downside of 5.6%.

• Expects power and fuel cost to remain elevated in Q3 as the company maintains inventory of 30-45 days.

• Sector outlook remains positive, momentum to continue in urban infra, Bharatmala and metro projects. Demand for warehousing space to be strong on back of e-commerce and retail growth coupled with 13-14% increase expected in office space demand in CY22.

• At current market priuce, the stock factors in all the near to medium term positives.

• Maintains ‘hold’ rating, cuts target price by 3% to Rs 360, implying a potential downside of 3%.

• Ambuja’s Ebitda missed IDBI Capital’s estimates by 18% but was in line with consensus estimates.

• Versus ACC, Ambuja numbers are better with higher volume growth and lower QoQ fall in the Ebitda margin.

• On operational front, cement demand is expected to remain strong in CY22/23 and need to watch for price hikes to pass cost inflation.

• Ambuja’s current valuation (including announced plant-wise expansion is at $160 per tonne) is at premium valuation and is due to buyback offer.

• Need to watch for timelines of merger of ACC and other efficiency gains in the process.

• Maintains ‘neutral’ rating at a target price of Rs 390, implying a potential upside of 5%.

• In recent years, Ambuja narrowed the efficiency gap with its peers by adopting cost‐effective measures like higher volumes and optimised lead distance; optimising fixed costs and specific energy consumption.

• Ambuja Cement to invest Rs 3,500 crore for potential 7 million tonnes per annum expansion plan in the eastern market to restrict the incremental market‐share loss due to slower capacity addition.

• Maintains ‘sell’ rating, cuts target price to Rs 315 from Rs 324, implying a potential downside of 15%.

• Decent set of numbers amid a challenging quarter wherein cost pressures were high and pricing weak.

• Strong volume growth of 15% owing to ramp up of recently commissioned Marwar Mundwa plant and better realisations partially offset the impact of rising costs.

• Company has been able to improve its efficiency over the past few quarters on account of higher usage of alternate fuel and raw materials, reduction in clinker factor and thermal and electrical energy consumption, network optimization through master supply agreement with ACC and various other initiatives under ‘I Can’ programme.

• Tweaked assumptions to factor in higher than anticipated cost inflation and as a result we have moved our CY22 and CY23 Ebitda estimates marginally lower. Given the ongoing acquisition process of Adani group and the open offer, Nirmal Bang believes that the stock will remain range bound closer to the offer price of Rs 385.

• However, based on earnings estimates, the stock is currently valued at ~16X CY23 EV/EBITDA which we believe is much higher.

Disclaimer: Adani Enterprises is in the process of acquiring a 49% stake in Quintillion Business Media Ltd., the owner of BQ Prime.