Ambuja Cements poised for highest volume growth: Nomura upgrades to ‘Buy’

Ambuja cements (Photo: Bloomberg)

Japanese brokerage Nomura has upgraded India’s second-largest cement company Ambuja Cements to Buy with a price target of Rs 780, an upside of 17 percent. This raised the price target to 19x from 14x to factor in the company’s rapid growth.

According to the broker, this is the result of the strong capacity expansion that the cement company is undergoing, combined with entry into new markets, growth that exceeds the sector and cost optimization measures.

Ambuja is in the process of adding 24 metric tons of capacity by fiscal year 2025-26 through a series of organic and inorganic expansions. Nomura said the company’s FY24-FY26 volume and earnings before interest, tax, depreciation and amortization estimates are slightly ahead of Ultratech’s.

“We are now modelling Ambuja on a consolidated basis, rather than standalone, and are not yet including Penna’s capacity. Our FY25/26F EBITDA estimates are Rs 72/103 billion; our FY26F EBITDA is in line with the Bloomberg consensus estimate. As a result, we are raising our EV/EBITDA multiple for the next one year to 19x (vs 17x for Ultratech) to reflect further capacity addition (Penna), and raising our TP to Rs 780 (from Rs 500),” the brokerage said in a recent report.

Volume growth unleashed

Ambuja Cements is set for a new round of inorganic expansion with the potential for highest volume growth in the sector, the broker said. At the same time, it was highlighted that Ambuja is in the process of acquiring Penna Cement with a capacity of 9 metric tonnes (MT) per annum. This implies a compound annual capacity growth rate (CAGR) of 14 percent over FY24-26F, compared to 6 percent and 9 percent for the sector and Ultratech respectively.

Analysts estimate that Ambuja should have a capacity of 106MT by FY26F, including Penna. They say that Ambuja has 20-25MT brownfield optionality, implying about 10MT of inorganic expansion to meet its ambitious capacity target of 140MT by FY27F.

“Based on our analysis, we highlight a few potential targets in Figure 24. Excluding Penna, we expect a volume CAGR of 13 percent over FY24-26F, the highest in the sector,” Nomura’s Jashandeep Singh Chadha wrote in the report.

Ambuja cements

Source: Nomura

Acquisitions to strengthen position

After the completion of Penna’s acquisition, Ambuja will become the third largest player in South India after only Ultratech and Ramco. Sanghi and Penna also offer Ambuja brownfield optionality with 823MT and 610MT of limestone reserves respectively, the analyst said.

Chadha further said that these acquisitions should compensate for ACC’s lack of brownfield optionality. ACC, formerly known as Associated Cement Companies, is an Indian cement producer based in Mumbai. It operates as a subsidiary of Ambuja Cements and a part of the Adani Group.

In addition, lower heat consumption and a higher share of green energy can lead to cost savings for Ambuja Cements.

“We believe that reduction in heat consumption and higher share of green power mix (30 percent by FY26F) should result in cost savings of at least INR60/t, which coupled with higher share of domestic coal, AFR, group synergies should lead to savings of INR200 in P&F costs/t by FY26F. We expect Ambuja to reduce its operating costs/t by INR300 in FY26F,” the brokerage said.

First print: Jul 11, 2024 | 08:53 AM IST