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JMFL
Ambuja Cements (Buy)
CMP: ₹212.95
Target: ₹250
India’s cement sector is favourably placed to benefit from the multiple tailwinds: rising demand (14 per cent y-o-y in FY19), improving utilisations and subsiding cost inflation. Additionally, we forecast lower-than-expected supply to come through on account of volatile earnings, stretched balance sheets of certain players and higher costs of funding. As a result, we believe 45 per cent of the FY19-21 pipeline capacity (30-35 mtpa) will be delayed, further improving the demand-supply dynamics.
Costs would be a key tailwind for the sector as prices of coal/petcoke/diesel have declined 15 per cent/7 per cent/7 per cent. Further, with relaxation of axle load norms, freight costs are expected to decline 2-4 per cent.
We estimate a cumulative benefit of ₹120-150/t to accrue to companies from 4Q (15-20 per cent of sector EBITDA/t).
We prefer select mid-caps over large caps as sector earnings is expected to stabilise and mid-caps have significantly underperformed large-caps (26 per cent — six months).
While we are building in ₹100-150/t EBITDA per tonne improvement over FY19-21, an increase in prices on the back of higher utilisation would lead to an earnings upgrade in the sector.
We upgrade Ambuja to ‘buy’ as Holcim-Lafarge’s announcement of 8.5 mtpa expansion in India addresses concerns on the company’s growth profile.
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