Growth optimism in the price: The stock has run up significantly c75% YTD (vs BSE Sensex at 22%), and is currently trading at 16x FY23e EV/EBITDA. This is 25% higher than the 5-year average and narrows the discount to larger growth oriented peers like Ultratech (UTCEM IN, INR7,929.85, Buy) (to c5% vs 5yr average discount of 20%).
Historically, Ambuja has disappointed the street with relatively slow and at times delayed capacity addition, leading to market share losses over the past decade.
However, completion of the long-awaited 3MTPA capacity at Marhwa Mundwa and increasing confidence on the renewed growth focus (target to expand to 50MTPA capacity in five years from 30MTPA currently) has partly buoyed investor sentiment. A better than expected pricing environment has helped the stock price as well.
We remain positive on the overall cement demand environment, as discussed in our note The party is not over yet (17 March 2021), led by both the infrastructure and housing sectors. Within that, Ambuja is well positioned, with presence in the stable and growing Northern and Eastern markets (cumulatively 60% of capacity). We already factor in volume growth of 12% CAGR over CY20-23e. We remain watchful of growth execution and signs of acceleration to become more constructive.
What is driving our higher TP: Notwithstanding the marginal pricing pressure emerging in the past two months (July-August), we expect FY22/CY21 pricing trends for the industry to be better than our earlier expectations. A broad-based (by region) pick-up in demand and pass-through of a rise in input costs should lead to an upward revision in realisations. As discussed in our recent notes (eg Cementing ESG, 12 May 2021, and Improving operational resilience, 30 April 2021), ongoing cost efficiency programmes at Ambuja have exceeded market expectations and should more than offset the rise in input costs. We increase our realisation assumption by 3% in CY22/23e, leading to an 11-15% increase in CY22e/ 23e earnings, partially offset by higher input costs. Importantly, factoring in improved growth and operating metrics we increase our valuation multiple for Ambuja to 15x CY23e EBITDA (from 13x), which is a 12% discount to our target valuation for its largest peer. We thus raise our TP to INR420 (from INR340).
Downgrade to Hold: With c4% downside implied by our new TP, we downgrade our rating to Hold, from Buy. There is limited upside risk to our revised valuation and estimates without a meaningful positive surprise in capacity expansion and pricing. Our CY21/22e EBITDA estimates are already 3-5% above consensus. Higher than expected non-trade mix is a risk to realisations, while continued increase in petcoke and diesel prices is still a risk to earnings. As expected, peers’ capacity addition plans have also gathered pace, especially in the North, Central, and by smaller regional players.