Cement stocks are continuing on a rampage as a result of the stock market's price correction. Cement stocks are in focus and one key reason behind the same is that CRISIL recently claimed that retail prices of cement, which have risen by an average of Rs 10-15 per bag pan-India since August, are likely to rise another Rs 15-20 over the next few months and reach all-time highs of Rs 400 per bag this fiscal due to high input prices such as coal and diesel. ICICI Securities is also bullish on Ambuja Cement (ACEM) shares at a time when cement stocks are hot. From the current market price of Rs. 376, the brokerage expects the stock to achieve a target price of Rs. 464.
The brokerage’s analysis
In its latest research report, ICICI Securities has noted that "~10mnte capacities would be commissioned by CY23E between ACC and ACEM, providing reasonable volume growth visibility over CY21-24E. ACEM intends to increase its capacities to 50mnte from the current 31.5mnte over the medium term including exploring expansion at Bhatapara in East and Maratha in West. Improved execution on capacity creation & sustaining market share would be key for re-rating. Recent North expansion likely to add >Rs50/te in overall EBITDA/te, owing to higher profitability of North / West (say additional EBITDA/te of ~Rs100-150/te vs company average for ~4mnte volumes), increased cost efficiencies of newer plants (>Rs400mn), and additional government incentives (>Rs500mn)."
According to the brokerage "Better cost efficiencies can drive additional EBITDA/te of >Rs100/te over CY21-CY24E. ACEM plans to increase its WHRS capacity from the current 6MW to 60MW by Jun'22 and further to ~90MW by Dec'23. Similarly, the share of solar power is expected to rise to >10% by CY23E from the current 2%. This would translate into cost savings of >Rs2bn p.a. (~Rs70/te). Besides, other efficiency measures, including improving the blending ratio, higher direct despatches (currently 60%), source mix optimisation, fly-ash dryers, railway sidings at Rabriyawas, along with the MSA with ACC, could drive additional cost synergies, in our view."
The report also says that "Improved performance by subsidiary ACC. ACC's EBITDA/te has improved from Rs736/te in CY18 to Rs1,124/te in 9MCY21E and is likely to exceed Rs1,200/te by CY23E led by increased cost efficiencies. 5mnte Ametha expansion is expected to be operational by CY22-23E, improving volume growth and profitability prospects. ACEM enjoys strong balance sheet and returns ratios: Standalone ACEM net cash is likely to rise from Rs29bn as at CY20 to Rs79bn as at CY23E. Hence, we see the possibility of a higher dividend payout. Standalone ACEM also enjoys industry-leading RoCE / RoE of >20%."
Buy Ambuja Cement With A Target Price of Rs. 464
The brokerage has claimed that "We expect Ambuja Cements (ACEM) to further improve its EBITDA/te (say by >Rs150/te over CY21-24E) led by a better market mix (rising share of North) and increased cost efficiencies, and narrow its EBITDA/te gap vs peers. The recent ~5mnte Marwa-Mundwa expansion would not only enable ACEM to sustain its market share but also likely improve overall EBITDA/te by >Rs50/te, given higher profitability in North / West, better cost efficiencies of the new plant and additional government incentives. Increasing share of WHRS from 6MW to ~90MW by CY23E and higher efficiencies via MSA with ACC could drive another >Rs100/te EBITDA/te expansion, in our view. Accordingly, ACEM's valuation gap vs larger peers may shrink further and its outperformance (seen over the past two years) is likely to continue in the medium term. Maintain BUY with an unchanged target price of Rs464/sh (13x standalone CY23E EV/E). Key risk: Lower demand/prices."
The stock has been picked from the brokerage report of ICICI Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.