Ambuja Cement rating: Maintain ‘buy’ with unchanged target price of Rs 255

Ambuja Cements’ (ACEM) various cost optimisation initiatives coupled with MSA synergies with ACC under Neeraj Akhoury, MD&CEO (also India head, LafargeHolcim) could achieve sustainable cost reduction (at least 15-20% of CY19 Ebitda/te, in our view) over the next few years.

Commissioning of 3.1mnte clinkerisation plant at Marwa-Mundwa by H1CY21E would not only lend better volume visibility, but also improve overall profitability. With higher profitability, valuation gap vs peers may narrow. We maintain our CY20E-CY21E Ebitda estimates (~13% ahead of consensus) with the target price unchanged at Rs 255/share (10x Mar’22E EV/E). ACEM currently trades at an attractive valuation of 8.3x CY21E EV/E (for consolidated capacity of ~66mnte). Maintain buy.

ACEM’s cost optimisation initiatives under programme ‘I can’ targets to achieve significant cost savings (at least 15-20% of CY19 Ebitda/te, in our view) via: unlocking efficiencies in procurement and supply chain (clinker factor reduction, decrease in spare inventory, source mix optimisation); reducing distribution costs (reduction in primary and secondary freight, higher direct despatches, warehousing cost rationalisation); and fixed-cost rationalisation (via renegotiating contracts and curtailing a few expenses).

Besides, ACEM plans to set up WHRS plants at Darlaghat and Bhatpara (19.5MW at each location) at a capex of Rs 3.8bn by Q4CY21. Subsequently, the company may set up WHRS plants at Maratha and Ambujanagar in addition to solar plants totalling 40MW. Railway sidings project at capex of Rs 2.1bn at Rabriyawas, Rajasthan, and underground mining at Gare- Palma coal block (at Rs3.6bn) are expected to be completed over next two years.

ACEM-ACC likely achieved maximum volume swaps and more than doubled synergies during Jun’20 (up from Rs 60mn-70mn p.m. during H2CY19) via network optimisation and better realisation, to be shared almost equally.