Wednesday, July 4, 2012


Demand to rise, but delay in start of new projects a concern; Hold

A management meet with Ambuja indicates a positive outlook on company prospects. Cost rationalization and capacity bottlenecks are immediate focus areas. We retain a Hold rating given steep valuations.

 To contest CCI penalty. The CCI, which accused 10 companies of cartelization, has penalized Ambuja `11.6bn. Contesting the allegations, Ambuja will take the case to the Competition Appelate Tribunal; in six months it expects a verdict. The amount will be reflected as a contingent liability. The penalty is 14% of FY12 net worth (10-26% for the others).

 Demand outlook. Ambuja expects cement demand in CY12 to be 9%, led by robust demand from retail/individual housing builders (82% contribution) supported by a strong network of 7,000 dealers and 25,000 retailers. Its strong presence in the growing and high utilization markets of the North, West and East put it in an advantageous position.

 Cost rationalization. Ambuja aims at cost-rationalization via alternative raw materials (synthetic gypsum, fly ash), cost-efficient sea transport (now 14%) and alternative sources of energy (wind-turbines, waste-heatrecovery plants). We expect the resultant benefits to trickle in only from CY14. It expects cost rises in fuel to be lower in CY12 than in CY11.

 Growth plans. Ambuja plans `18bn in CY12-13 on maintenance, logistics, efficiency improvements and remove capacity bottlenecks (to add 0.5m tons clinker, 0.9m-ton grinding). Delay in start of greenfield/brownfield clinker projects is a concern as it may curtail dispatch growth in CY13, affecting market share (now 10%). Clearance for a greenfield site in Rajasthan is under way; equipment orders are likely in Dec ’12, with a 30-month set-up time.

Valuation. At our `165 price target, the stock would trade at 8x CY12e EV/ EBITDA. The price target implies a PE of 15.1x and an EV/ton of US$157. Risks: Coal price hikes, weak cement prices.