cement ambuja cements ltd. - myirisbreport.myiris.com/nsbl/gujambce_20120510.pdf · cement...

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INDIA

Institutional Research

CEMENT

Initiating Coverage

Ambuja Cements Ltd.

Attractively valued post correction, better placed among peers

Initial Coverage Networth Research is also available on Bloomberg and Thomson Reuters.

Date: 10 May 2012

Analyst: Suhani Patel [email protected]

Ph. No. 022 3064 1744

Ambuja cements Ltd. (ACEM), part of Holcim Group, has the most attractive regional positioning among large cement players with no exposure to South (where oversupply concerns prevails). This will help to improve its capacity utilization and pricing power. Historically the company always traded at a significant premium to the prevailing replacement cost, given its higher profitability and leading return ratios. We expect this premium to continue as profitability improves. Our TP for ACEM based on 8× CY13E EBIDTA stands at Rs 180 which implies 23% return. We initiate coverage on ACEM with a Buy rating.

Investment Theme

Favorable regional mix

ACEM has a strong presence in regions other than South India, the latter being at the greatest risk of cement oversupply. Though other regions enjoy 80–90% utilisation while, South is still running at capacity utilisation levels of just 60-65%. Considering strong demand scenario in North and West, we expect volume growth to improve to 9% CAGR over CY11-13 as against 5% CAGR over CY09-11.

Better EBITDA margins compared to peers

We expect ACEM to continue registering higher EBITDA margins compared to peers owing to 1) its strong focus upon regions exhibiting rising demand such as Western and Northern India 2) Better logistical set up with 10 ships for sea transportation to Western coast 3) strong network of 7800 dealers and 25000 retailers allowing it to sell 80% of the products to the retail segment where prices are higher than the bulk market.

Healthy balance-sheet provides comfort

Ambuja has the strongest balance sheet among its peers. At the end of CY11, it had a net cash of Rs 20bn. As the operating cash flows of the company are likely to be much higher than its capex, we expect the company to generate free cash flow of Rs 29bn over the next two years. Hence we believe the company is well placed to tap inorganic growth, given the potential scope for consolidation within the industry due to excess capacity.

Valuation

On EV/EBITDA basis, the company is trading at 7.4x CY12E EBITDA and 6.1x CY13E EBITDA respectively. We value the business at 8x CY13E EBITDA. Our CY13 based target price is Rs 180 per share, implying 23% upside.

Rating BUY Target Price ` 180

CMP ` 146

Upside 23%

Sensex 16479

Key Data Bloomberg Code ACEM IN Equity

Reuters Code Ambuja.BO

NSE Code AMBUJACEM

Current Share o/s (mn) 1534.4

Diluted Share o/s (mn) 1534.4

Mkt Cap (`bn/$mn) 226.7/4253.9

52 WK H/L (`) 182/119.9

Daily Vol. (6M NSE Avg) 2817197

Face Value (`) 2

Beta 0.83

1 USD/` 53.3

Shareholding Pattern (%) Promoters 50.3

FII 25.8

Others 23.9

Price Performance (%) 1M 6M 1yr

Ambuja -11.5 -14.1 7.6

Sensex -4.1 -6.5 -9.2

Source: Bloomberg; *As on 98th May, 2012

(Rs Cr)

Revenue YoY% EBIDTA Margins (%) PAT Margins (%) FDEPS ROE (%) RoCE (%) P/E P/B EV/EBIDTA

2010 7390 4.4 1823 24.7 1263 17.1 8.3 17.2 21.2 17.6 3.0 10.9

2011 8531 15.4 1906 22.3 1227 14.4 8.0 15.3 20.3 18.1 2.8 10.2

2012E 9861 15.6 2449 24.8 1443 14.6 9.4 15.9 22.0 15.4 2.4 7.4

2013E 11389 15.5 2821 24.8 1703 15.0 11.1 16.4 23.0 13.1 2.1 6.1

mailto:[email protected]

2 Initiating Coverage

Its largest markets are North India (40% of sales volumes) and West India (40%). East India accounts for 20% of its volumes.

Investment Theme

Third largest cement manufacturer with no presence in south

Ambuja Cement (owned by Switzerland based Holcim group) is the third largest cement manufacturer in India having cement capacity of 27.35 MTPA and clinker capacity of 16.8 MTPA. The company has a strong presence in regions other than South, which is at a risk of cement oversupply. Exhibit 1: Market share (%) in different regions

17%

12%

24%

North East West

Source: Company, Networth Research

Exhibit 2: Region-wise cement capacity (%)

41%

30%

24%

5%

North West East Central


Exhibit 3: Region-wise volume break-up (%)

40%

20%

40%

North & Central East West



Volume growth to improve to 9% CAGR over CY11-CY13 as against 5% CAGR over CY09-11

For FY12, both West and North have shown a robust growth of 14% and 13% respectively. With no significant capacity expansion in both West and North, softening of interest rates, start of work on the Mumbai Metro, Delhi Mumbai Industrial Corridor and Delhi Metro Rail Corporation, we expect the consumption in West and North to grow at a CAGR of 11% and 10% in FY12-14E respectively. ACEM currently with 24% market share is the second largest in West and with 17% market share by capacity in North is the third largest. Given the company’s significant exposure to high growth areas like West & North, we expect volume growth to improve to 9% CAGR over CY11-13 as against 5% CAGR over CY09-11. Exhibit 4: Dispatches and growth trend

0%

2%

4%

6%

8%

10%

12%

0

5

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20

25

30

CY08 CY09 CY10 CY11 CY12E CY13E

Dispatches Growth (%)


Western Region: Capacity addition to decline, Demand growth continues.

Western region has posted growth of 3% CAGR in FY08-11. However, there has been a strong pickup in demand in the West, showing a growth of 14% in FY12. Western India’s demand is predominantly driven by growth in industrial and infrastructure segment. Hence with softening of interest rates and pick up of work in metro construction in Mumbai, we expect the demand to witness 11% CAGR in FY12-14E. At the same time with no major capex, we expect the effective capacity to show 6% CAGR in FY12-14E; hence, we expect the utilisation levels to reach 96% in FY14E. Exhibit 5: Capacity utilisation trend in West

75%

80%

85%

90%

95%

100%

0

5

10

15

20

25

30

35

40

45

50

FY09 FY10 FY11 FY12E FY13E FY14E

Effective cement capacity (mn tonnes) Despatches (mn tonnes)

Capacity utilisation (%)



Average OPM at ACEM over the next 2 years are expected at 25% compared to 21-22% for the players like Ultratech and ACC.

Northern Region: Demand growth continues.

Northern region has posted a healthy growth of 10% CAGR in FY08-11. However, the region had exhibited a growth of mere 3% in FY11, lowest in the last four years owing to slower demand. In FY12 North region reported growth of 13% primarily on account of strong demand in major states (Punjab and Rajasthan) of North, which grew by 6%Y-o-Y respectively. We expect demand to grow at CAGR of 10% over FY12-14E on account of softening of interest rates and start of work on the Delhi Mumbai Industrial Corridor and Delhi Metro rail Corporation. At the same time with no major capacity to hit the market, we expect the capacity to witness a CAGR of 7% in FY12-14E. Hence, we believe the utilisation to reach to 89% in FY14E. Exhibit 6: Capacity utilisation trend in North

70%

75%

80%

85%

90%

95%

0

10

20

30

40

50

60

70

80

FY09 FY10 FY11 FY12E FY13E FY14E

Effective cement capacity (mn tonnes) Despatches (mn tonnes)

Capacity utilisation (%)


Better EBITDA margins compared to peers

We expect ACEM to continue registering higher EBITDA margins compared to peers owing to 1) its strong focus upon regions exhibiting rising demand such as Western and Northern India 2) Better logistical set up with 10 ships for sea transportation to Western coast 3) strong network of 7800 dealers and 25000 retailers allowing it to sell 80% of the products to the retail segment where prices are higher than the bulk market.

Exhibit 7: Best among the peers

0%

5%

10%

15%

20%

25%

30%

35%

40%

CY07 CY08 CY09 CY10 CY11 CY12E CY13E

ACC Ambuja Ultratech*

*For Ultratech cement CY07 is FY08 and so on. Source: Company, Networth Research


Healthy balance-sheet provides comfort

Ambuja has the strongest balance sheet among its peers. At the end of CY11, it had a net cash of Rs 20bn. As the operating cash flows of the company are likely to be much higher than its capex, we expect the company to generate free cash flow of Rs 29bn over the next two years. Hence we believe the company is well placed to tap inorganic growth, given the potential scope for consolidation within the industry due to excess capacity. Exhibit 8: Free cash flow and D/E trend

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0

200

400

600

800

1000

1200

1400

1600

1800


FCF (Rs cr) D/E


Financial Outlook

ACEM’s revenue is expected to grow at a CAGR of 15% over CY11-CY13E mainly on account of substantial contribution coming from western and Northern region where demand is very strong which will help to boost the volumes and aid further price hike. EBIDTA margin is expected to improve from 22.3% in CY11 to 24.8% in CY13E (an increase of 250 bps), which is mainly on account of hike in realisation, shift towards captive power plant.

Exhibit 9: Net Sales outlook

0

2

4

6

8

10

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16

18

0

2000

4000

6000

8000

10000

12000


Net sales YoY%



Exhibit 10: EBITDA and PAT margins (%)

0%

5%

10%

15%

20%

25%

30%


EBITDA Margin (%) PAT Margin (%)


Exhibit 11: ROE and ROCE (%)

0%

5%

10%

15%

20%

25%

30%


ROE (%) ROCE (%)



Investment Concerns

Adverse ruling on cartel by CCI

The Competition Commission of India (CCI) has completed its enquiry on 40 cement companies regarding price fixing, and is likely to table its report soon. If found guilty, the CCI will likely announce penalties in the next month or so. Based on recent trends, it is likely to be 6–7% of total revenue or around 50% of Net Profit.

Higher than expected fuel cost may impact the margins

ACEM’s current fuel mix comprises linkage coal to the extent of 35%, imported coal at 30% and the balance is met through e‐auction coal. Going forward, if due to coal India’s inability to ramp up the production may result in lower linkage coal, ACEM may have to compensate the short fall by expensive imported coal which may reduce the OPMs going forward.


Valuation

We have a positive view on the cement sector, driven by our belief that: 1) the current price discipline among producers will persist; 2) demand growth is likely to bounce back in 2HFY13; 3) FY14 will be driven by increased investment in infrastructure and government spending before the state and central elections; 4) Softening of interest rates would be a big positive for the sector, thereby positively impacting the credit off take from both housing and industrial segment. Indian cement companies have declined by 10-15% from the recent peak, driven essentially by fears of large penalty in the CCI investigation. There is no clarity as to when the final report would be submitted. Stocks can see a rebound from current levels if the CCI investigation report is not harsh on the industry and vice versa. At the current price, stock is trading at rich 6.1x CY13E EV/ EBITDA and EV/ton of $131. Looking at the current EV/tonne of $ 142 the stock is trading at a significant premium over the replacement cost of $110 per tonne. However we believe that ACEM deserves the premium valuation due to strong presence in high growth markets and its healthy financials. Exhibit 12: Comparison with peers

EV/Ton ($)

Companies CMP Market Cap CY11 CY12E CY13E

ACC 1224 22999.0 11.4 10.4 9.3 136

Ambuja 146 22401.5 9.7 8.3 7.3 142

Ultratech* 1404 38469.6 9.6 8.7 7.6 161

EV/EBITDA

*CY11=FY12 and so on , Source: Company, Networth Research

We initiate coverage of ACEM with a Buy rating and target price of Rs 180 based on its 5-year average EV/EBITDA of 8x. Exhibit 13: Valuation

Valuation Methadology CY13

EBITDA 2821.3

EV/EBITDA 8

EV 22570.2

Debt 69.6

Cash 4253.5

Investments 806.0

Market Cap 27560.2

No. of shares 153.4

Target value 180 Source: Company, Networth Research


Exhibit 14: One year forward EV/EBITDA band

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

40000.00

4X

6 X

8 X

10 X

12 X

14 X



Company Background

Ambuja Cements Limited was set up in 1986. The company is controlled by the Holcim group, which owns 51%. The total capacity of the company as on CY11 is 27.35 MTPA with 410 MW of captive power capacity. Ambuja has a presence in all the regions except South. Its plants are situated in Gujarat, Maharashtra, Himachal Pradesh, Punjab, Rajasthan, Uttarakhand, Uttarpradesh, Chhattisgarh and West Bengal. It is the first Indian cement manufacturer to build a captive port with three terminals along the country's western coastline and has its own fleet of ships. The company has a port at Muldwarka, Gujarat and Bulk Cement terminals at Surat, Gujarat, Panvel, Maharashtra, Kochi and Kerala. Ambuja is one of the major exporters of cement in India. The company largely exports to the Middle East.

Exhibit 15: Total Cement Capacity

Plants MTPA

Gujarat 5.50

Himachal Pradesh 5.20

Maharashtra 2.70

Rabriyawas Rajasthan 1.80

WB 2.25

Punjab 3.10

Chhatisgarh 4.30

UP 1.50

Uttarakhand 1.00

Total installed capacity 27.35 Source: Company, Networth Research


Financial Summary

Income Statement (`Cr)

Y/E March CY10 CY11 CY12E CY13E

Net Revenues 7390.2 8531.2 9861.0 11389.4

Growth % 4.4 15.4 15.6 15.5 COGS 2228.0 2644.0 2881.8 3531.6

Gross Profit 5162.2 5887.3 6979.2 7857.8

Growth % 10.8 14.0 18.5 12.6

SG&A Expenses 3339.2 3980.9 4530.1 5036.5

Core EBITDA 1823.0 1906.4 2449.1 2821.3

Growth % -2.3 4.6 28.5 15.2

Other Income 247.6 318.7 219.4 281.5

EBITDA 2070.6 2225.1 2668.5 3102.8 Depreciation 387.2 446.2 507.4 553.7

EBIT 1683.4 1779.0 2161.1 2549.1

Growth % -7.7 5.7 21.5 18.0

Interest Exp 48.7 53.5 7.0 6.8

EBT 1634.7 1725.5 2154.2 2542.3

Tax 398.3 473.8 710.9 839.0

PAT 1263.0 1227.2 1443.3 1703.4

Growth % 3.8 -2.8 17.6 18.0

Cash Flow Statement (`Cr)


PAT 1263.0 1227.7 1443.3 1703.4 Depreciation 387.2 446.2 507.4 553.7 Changes in WC 364.9 -63.7 35.3 58.8 Cashflow from Operations 2015.1 1610.2 1985.9 2315.9

Capital Expenditure -791.2 -728.8 -399.3 -900.0

Investments 101.3 -184.9 0.0 0.0

Misc items 2.25 -0.51 0.70 0.00

DTA 0.00 -0.70 0.70 0.00

Cashflow from Investments -687.6 -914.3 -398.6 -900.0

Cash Flow from Financing -459.9 -369.0 -379.8 -445.3

Net Change in Cash 867.5 327.0 1207.6 970.6

Balance Sheet (`Cr)


Cash and Equi. 1748.4 2075.4 3282.9 4253.5 Receivables 128.2 247.8 217.3 250.9 Inventories 901.9 927.8 914.8 1029.8 Loans and Advances 340.3 563.6 603.0 696.5 Other Assets 17.0 25.4 24.7 24.7 Investments 621.1 806.0 806.0 806.0 Fixed Assets 6562.7 6845.3 6737.2 7083.5 Application of Funds 10319.6 11491.2 12586.0 14145.0 Accounts Payable 1109.2 1356.5 1387.9 1688.8 Other Liabilities 191.3 246.6 246.6 246.6 Provisions 1096.6 1106.9 1106.9 1106.9 Deferred Tax Liabilities 530.9 644.5 644.5 644.5 Loan Funds 65.0 69.6 69.6 69.6 Minority Interest & others 1.43 34.58 32.12 32.12 Reserves and Surplus 7019.2 7725.7 8791.6 10049.7 Equity Capital 306.0 306.9 306.9 306.9 Sources of Funds 10319.6 11491.2 12586.0 14145.0

Financial Ratios


Profitability Core EBITDA margins 24.7 22.3 24.8 24.8 Net Profit Margins 17.1 14.4 14.6 15.0 Return ROE 17.2 15.3 15.9 16.4 ROCE 21.2 20.3 22.0 23.0 Liquidity and Gearing Cash Conversion Cycle -30.8 -37.0 -48.1 -51.0 Current Ratio 1.3 1.4 1.8 2.1 Debt/Equity 0.0 0.0 0.0 0.0 Per Share EPS 8.3 8.0 9.4 11.1 Operating CashflowPS 13.2 10.5 12.9 15.1 BVPS 47.9 52.4 59.3 67.5 Valuation Price/Earning 17.6 18.1 15.4 13.1 Price/BV 3.0 2.8 2.4 2.1 EV/EBIDTA 10.9 10.2 7.4 6.1 EV/Ton $ 177 150 133 131


Networth Research: E-mail- [email protected]

E-mail: [email protected] Tel: 022 3064 1600

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Key to NETWORTH Investment Rankings

Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by -5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15

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