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Event update: Cement - Holcim companies announce future growth plans

Event

Holcim Group companies - ACC and Ambuja have announced cement capacity additions. ACC is adding capacity of 5.9mtpa at a cost of US$71/t in Central region (MP and UP), while Ambuja has increased its ongoing clinker capacity addition by 1.4mtpa in Rajasthan.

Details

Ambuja Cement

• The company has announced additional clinker capacity of 1.4mtpa at Marwa Mundwa in Rajasthan. This is in addition to the already ongoing capacity addition of 1.71mtpa and will take the total clinker capacity to 3.1mtpa at Marwa-Mundwa.
• The incremental capex would be Rs9.6bn for the additional 1.4mtpa clinker capacity, additional 1.8mtpa grinding capacity and also the captive power plants and WHRS plants. This would result in total capex of Rs23.5bn or Rs7581/t or US$105/t. The plant will be commissioned by Sept-2020.
• With these expansions, Ambuja's cement capacity would increase from 29.7mtpa to 31.5 mtpa.

 ACC Cement  

• ACC has announced a capacity expansion of 5.9mtpa in the central region (MP and UP). The capacity expansion consists of 3mtpa clinker plant at Katni, MP and brownfield grinding locations across some of its central plants. The upcoming grinding units will be at the following locations:

o   1mtpa at Katni, M.P.

o   1.6mtpa at Tikaria, U.P.

o   2.2mtpa in U.P.

o   1.1mtpa at Sindri, Jharkand

• The plants are expected to be set up in phases with likely commissioning of grinding units in initial stages and completion of the clinker unit in 3 years by 2021.
• This grinding capacity will help utilise the excess clinker at Jamul plant and boost ACC’s capacity to 39.3mtpa once all the plants are commissioned.
• The capex is at ~US$71 on EV/T basis and is relatively lower on account of brownfield expansions of grinding capacity and support infrastructure already available at Katni, MP for the clinker unit.

Impact of this capacity addition on Industry

The plants being set up by Ambuja and ACC will largely be commissioned in 2HFY21 and be ramped up in FY22. Accordingly, any impact of the same will be visible over the long term. In the meanwhile, capacity additions in the North and Central market are limited over the next two years. Moreover, demand in both these regions has picked up over the past year and continues to be robust in FY19. Accordingly, we believe demand will grow ahead of capacity in these regions. This would drive higher utilisations and thereby pricing power for cement manufacturers over the next year.

Valuation and view

Ambuja is trading at 10.2x CY19 EV/EBITDA and US$107 on EV/T basis. ACC is trading at 10.5x CY19 EV/EBITDA and US$101 on EV/T basis. Overall, both ACC and Ambuja have announced capacity expansions in line with their strategy to grow volumes and gain market share. The capacity addition addresses concerns on volume growth over the long term for the group. We continue to like both ACC and Ambuja considering reasonable valuations, re-focus of mgmt. on the operations post corporate re-structuring and sustained growth momentum. Maintain Outperformer rating on both ACC and Ambuja.