>Ambuja Cement Limited (HDFC Securities)

• Benefits of capacity addition insignificant: ACEM has planned to increase its installed capacity by ~5.5 mt in different stages during CY09 and CY10. Though we expect the entire capacity to get commissioned by H1CY10, we don’t think this will result in a sales volume growth due to a demand-supply mismatch.

• Capacity Utilization rates set to decline: We expect the capacity utilization rate of ACEM to decline to the levels of 81% in CY09 and 77% in CY10 against ~95% in CY08 as we believe the company will perform in line with the industry. We expect the sales volume of the company to grow at a CAGR of 1.4% for the period CY08 to CY10E.

• Cost pressure expected to ease: ACEM is dependent on Imported coal for ~30% of its requirements. The cost of imported coal has corrected by ~50% over the last 5-6 months, which will protect the operating margins of the company in CY09.

• Operating benefits expected to come down in CY10E: ACEM enjoys one of the best operating margins in the Industry. However, we expect this benefit to ease in CY10 with the downturn in the cement cycle. We believe the realization of the company will decline by 3.3% in CY09 and by a further 5% in CY10. We expect the margins of the company to remain stable in CY09, but drop by 506 bps to 23.8% in CY10E.

• Earnings to decline: With operating benefits and realization set to decline over next two years, we believe the earnings of the company will decline at a CAGR of 17.4% for the period CY08 to CY10E.

• Merger with ACC can provide synergy benefits: We feel the merger of Ambuja with ACC can provide synergy benefits going forward, in terms of rationalization of the distribution system and reduction in duplication of work. However, the management has not indicated anything on this.

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