Buy Recommendation – Ambuja Cements
Ambuja Cements, an all-India cement manufacturer that holds a 10 per cent share of the cement market in India, can be considered for investment at the current market price of Rs 121.
The company is poised for better-than-industry growth with recent additions to its clinker (4.4 million tonnes) and cement grinding capacity (3 million tonnes). Volumes can be expected to support sales growth even if realisations remain muted over the medium term. Over the last two quarters, Ambuja Cements has shown a strong comeback in profits after reporting negative growth for the year 2009.
Though cement may be an out-of-favour sector now, the stock of Ambuja Cements may be a good addition to a long-term investor’s portfolio.
The company’s strong dealer distribution network with over 6,000 dealers and 20,000 retailers across the country, increasing production capacity and initiatives on the logistics front will help Ambuja Cements retain a competitive edge over mid-sized players.
The stock trades at price-to-earnings multiple of 14 times (trailing) now, its historical PE band being 10-22 times. In enterprise value terms, the stock has always commanded a premium, its EV currently is Rs 7,500/tonne, higher than the industry average of Rs 5,500-6,000 a tonne. Investors who hold stocks of southern cement manufacturers can also consider switching to the stock of Ambuja Cements.
Volume strength
In 2009, when demand was growing at a double-digit rate, Ambuja Cements was constrained by its limited clinker capacity. But now the company is all geared up, having added to its clinker capacity. The company has added two clinker units, each of 2.2 million tonnes capacity, at Chhattisgarh and Himachal Pradesh (HP). It has also commissioned two grinding units (for cement) of 1.5 million tonnes capacity each at Uttar Pradesh and HP. The company’s overall capacity stands at 25 million tonnes now.
Cement demand in the Northern region may not hold up at last year’s rates. However, the company may still manage better than industry growth by taking the share of other players.
For the latest April-June quarter, the company reported a 12.6 per cent increase in domestic sales volumes (following increase in production) when the industry itself reported a consumption growth of only 6.6 per cent.
Ambuja Cements intends to add another two million tonnes of capacity (in Chhattisgarh and Maharashtra) by end-2010.
Efficiency in operation
Ambuja Cements’ operating margins improved by 300 basis points in the June quarter (33 per cent versus 30 per cent), thanks to a newly commissioned kiln and captive sourcing of clinker. Even as most other cement players reported fall in profits in the June quarter, Ambuja Cements reported a 20.5 per cent growth in after tax profits (sales up 11 per cent). For the half-year ended June 2010, the company’s PAT was up 30 per cent.
Savings on the logistics front by building ships to transport cement when other players wait for railway wagons, addition to captive thermal power capacity, substituting coal in the kiln with fuels such as lignite, biomass and industrial waste, will help the company improve its operational efficiency further.
Balance-sheet strength
Cash balances by end-June 2010 were Rs 1,313 crore, up from Rs 1,177 crore at the end of the same period last year (despite higher capex activities). The interest cover ratio was 37 times in the latest quarter. This suggests enough leeway for borrowings even if the company wants to part-fund further expansion through borrowings.
Switch from Southern players
Tight supply conditions and rising prices saw players in the Southern region expand their capacities significantly over the last one year. But now, the situation is different from what it was two years ago — supply is abundant, demand has slowed and prices have corrected, with the Southern region facing the brunt of the fall.
Lower despatches in the region have followed mainly lower offtake in Andhra Pradesh; the projects that got disrupted due to political chaos in the state have yet not resumed work.
Players in the south are looking at the option of sending their inventories to the West and other nearby regions.
Over the medium term, cement players with exposure to the markets of the North and the East appear set to do better than their Southern counterparts.
In the pockets other than the south, though growth may be slower than last year, offtake may continue to be reasonable. In the June quarter, consumption in the north region grew at 9 per cent (excluding despatches of ACC and Ambuja Cements).
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Buy Ambuja call target131.