Management Speak: Ambuja Cement (Outperformer) - Volume weakness offset by higher realisations

We met Ambuja Cement’s management; below are key takeaways

• CY19 volume to see negative growth: In 9MCY19, Ambuja has reported a 3.3% decline in volumes to 17.52mtpa on weak demand on back of monsoons, elections, liquidity constraints. Considering the sustained sluggishness in demand, volumes are likely to remain flat in 4QCY19. Demand has been the weakest in East on slow movement of government projects, while demand in North has been buoyant. Demand is expected to improve gradually over the next few months led by reconstruction activity post floods, uptick in rural demand, etc. Further, Ambuja is focused on increasing the share of premium products (10% of volumes) which will enhance profitability.
• P&F cost to moderate over the next two quarters: as high cost petcoke inventory has largely exhausted and benefit of lower petcoke prices will be gradually seen over the next two quarters. Further, Ambuja is working on various initiatives to increase the share of expansion of WHRS, CPP, solar and usage of AFR that will help in P&F cost savings. Concurrently, ramp up of Garre Palma coal block over the next 2 years would boost P&F cost saving as the coal block will cater to 15-20% of Ambuja’s overall fuel requirements.
• MSA agreement ramp up to drive cost savings of up to 3% (Rs1bn or Rs20-30/t) on PBT. The synergy of the MSA agreement was initiated in 1QCY19 and is being ramped up gradually to deliver full benefit by Mar-20. The benefits will largely be seen in freight costs driven by network optimization, axle load benefits, and contract re-negotiation leading to lower leads and better turn around.
• Marwar-Mundwa expansion is on track and is expected to be commissioned by Sep 2020 with a clinker capacity of 3.1mtpa, 1.8mtpa grinding capacity, 15MW WHRS plant and 30MW CPP capacity. While the grinding unit is only 1.8mtpa, the expansion will help optimize Ambuja’s excess grinding capacity in North driving strong growth in key markets of North and West.

Valuation and view

While near term volumes are a challenge on back of weak demand initiatives on cost efficiencies and capacity expansion would drive medium term earnings growth. Accordingly, we expect 26% consolidated earnings CAGR over CY18-20E. We believe consolidated valuations are attractive at 8.4x CY19E EV/EBITDA and US$99 on EV/t. Maintain Outperformer.