Ambuja Cements Ltd 19 April, BUY -...

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Company Report

Ambuja Cements Ltd 19th

April, 2012 BUY

For Private Circulation Only 1 Hem Research

CMP Rs.164.75

Target Price Rs.210.00

BSE Code 500425

NSE Code AMBUJACEM

Market Cap (Rs Cr.) 25290.03

52 Week High/Low 182.00/119.90

Industry Cement

Face Value Rs.2.00

Shares O/S 1535054961

EPS 8.17

Book Value 52.59

P/E 20.17

P/B 3.13

Shareholding Pattern

Research Analyst: Vineeta Mahnot [email protected]

� Ambuja Cements Ltd. (ACL) is one of the leading cement

manufacturing companies in India. The Company has maintained

its market share of around 9.5% on pan-India basis, despite the

prevalent challenging environment.

� The company has registered excellent numbers for the quarter

ending March 2012. The sales moved up 20% to Rs. 2660.93 crore

as compared to Rs. 2222.47 crore during the year-ago period.

Sales growth is led by higher volumes owing to capacity

additions coupled with demand pick up and improved prices.

The company's despatches grew 9.8% to 6.09 metric tonnes versus

5.55 mt (YoY). Sales quantity and net sales for this quarter is

highest ever in the history of the company. Operating profit

jumped sharply about 23.14% at Rs. 772.09 crore. A

comparatively good adjusted net profit growth of 45.12% to Rs.

591.35 crore was reported for the Q1CY12 compared to Rs. 407.48

crore of previous same quarter. During the quarter the company

has changed its method of providing depreciation.

� ACL has recorded a growth of 12.38% in their cement despatches

for March 2012. Despatches have gone upto 2.178 million tonnes

from the earlier 1.938 million tonnes clocked in March 2011

indicating increase in construction activities across sectors. The

company has hiked cement prices in March, to pass through the

20% railways freight increase and also excise duty hike in the

budget. Cement production increased by 9.1% compared to

previous year-to 5.59 million tonnes.

Valuation

With strong market presence, growing volumes and capacity

expansion plans, effective capacity utilization and price hikes and

higher realizations; ACL is well on its growth trajectory. We believe

Ambuja Cement Ltd. is trading at an attractive valuation at 16.15x

and 13.21x of FY12EPS of Rs.10.20 and FY13EPS of Rs.12.47. We

initiate a ‘BUY’ on the stock with a target price of Rs.210 (appreciation

of about 27%) with the medium to long term investment horizon.

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Business Details

Ambuja Cements Ltd. (ACL) is one of the leading cement manufacturing companies in India. The Company, initially

called Gujarat Ambuja Cements Ltd., was founded by Narotam Sekhsaria in 1983 with a partner, Suresh Neotia.

Sekhsaria’s business acumen and leadership skills put the company on a fast track to growth. The Company

commenced cement production in 1986. The global cement major Holcim acquired management control of ACL in

2006. Holcim today holds little over 46% equity in ACL. The Company is currently known as Ambuja Cements Ltd.

ACL has grown dynamically over the past decade. Its

current cement capacity is about 27 million tonnes. The

Company has five integrated cement manufacturing

plants and eight cement grinding units across the

country. ACL enjoys a reputation of being one of the

most efficient cement manufacturers in the world. Its

environment protection measures are on par with the

finest in the country. It is one of the most profitable and

innovative cement companies in India. ACL is the first

Indian cement manufacturers to build a captive port with

three terminals along the country’s western coastline to

facilitate timely, cost effective and environmentally

cleaner shipments of bulk cement to its customers. The

Company has its own fleet of ships. ACL has also

pioneered the development of the multiple bio-mass co-

fired technology for generating greener power in its captive plants.

Bulk Cement Terminals of the company:

Surat: Bulk Cement Terminal with a storage capacity of 15,000 tonnes has bulk cement unloading facility.

Panvel: Strategically located near India's biggest cement market, has a storage capacity of 17,500 tonnes and a bulk cement unloading facility.

Galle: 120 kms from Colombo, Sri Lanka. Handles 1 million tonnes of cement annually.

Cochin: The latest addition to ACL’s configuration of Bulk Cement Terminal

Ambuja Cement exports almost 17% of its production in a very competitive international environment. For the last ten years, Ambuja Cement remains India's highest exporter of cement.

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Strong Industry growth

The cement industry in India is experiencing a boom on account of overall growth of the Indian economy. Cement

demand emanates from four key segments namely: Housing, which accounts for 67% of cement demand,

Infrastructure – 13%, Commercial Construction – 11% and industrial – 9%. India is experiencing growth in all these

areas and hence the cement market is moving ahead in spite of the world-wide economic recession. India is the second

largest producer of quality cement in the world. The cement industry in India comprises 139 large cement plants and

over 365 mini cement plants. The cement industry in India is divided into four zones namely North, East, West and

Central - based on differentiation in the consumer profile and supply-demand scenario. Cement arrivals in Gujarat

during December 2011 have been the highest ever according to data compiled by the Cement Manufacturers'

Association (CMA) and industry sources. There has been a spurt in demand from infrastructure and Government

projects, which in turn led to such high cement arrivals.

The growth in cement despatches remained

subdued in the first half of the year. However,

a double-digit growth in despatches in the

preceding four months ending February 2012

pushed cumulative growth during April-

February 2012 to around seven per cent while

production grew by 6.7 per cent during this

period. Large companies which have declared

their dispatch numbers for March 2012

indicate healthy demand. ACC’s and Ambuja

Cement’s despatches grew by 7.3 per cent and

12.4 per cent to 23.4 lakh tonnes and 21.8 lakh

tonnes, respectively. This indicates demand is

likely to have remained healthy in March

2012. The year 2011-12 is likely to have ended

with a 6.4 percent despatch growth.

Along with an improvement in demand, the year 2011-12 is also expected to witness recovery in prices. Cement

realisations which were down in the 2010-11 are likely to rise by 9.2 per cent during the year. Rising costs, especially

that on power & fuel forced the cement manufacturers to take price hikes as their profitability was already under

pressure.

Cement despatches 6.9% up during April 2011-Feb 2012

Production Despatch

(Lakh tns.) (% chg.) (Lakh tns.) (% chg.)

Feb 11 184.5 6.7 183.9 7.4

Mar 11 209.3 6.8 209.4 6.6

April 11 183.6 -0.2 181.9 0.3

May 11 178.4 -2.1 177.7 -0.3

Jun 11 174.3 1.9 175.7 2.5

July 11 181.3 12.0 180.0 10.5

Aug 11 170.5 7.7 168.2 6.3

Sep 11 158.5 2.0 159.9 2.4

Oct 11 186.3 0.7 181.3 -0.5

Nov 11 176.2 18.1 177.4 20.3

Dec 11 196.7 13.7 197.8 14.0

Jan 12 206.3 12.0 204.2 11.2

Feb 12 203.4 10.3 204.4 11.1

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CMIE expects the demand for cement to remain strong in the coming years. With huge demand-supply gap in

housing, especially rural housing segment, demand is likely to rise. Also, the government’s increased thrust on

infrastructure creation will boost demand for cement. The investment in infrastructure is likely to go up to Rs.50 lakh

crore during the Twelfth five year plan (2012-17) as announced in the Union Budget 2012-13. Thus, cement despatches

are expected to rise at a healthy pace in the range of 7-8 per cent per annum during the next two years.

The excise duty on cement was raised to 12 per cent

from 10 per cent in the Union Budget 2012-13. The

differential duty based on Retail Sale Price per bag has

now been unified to a rate of 12 per cent plus Rs.120 per

metric tonne with a abatement of 30 per cent. Also, the

increase in freight rates announced by railway will add

to the cost pressures. CMIE expects companies to

completely pass on the rise in costs to customers.

Hence, cement realisations are expected to rise by 5.9

per cent in 2012-13 in spite of the excess supply in the

industry. Further in 2013-14, realisations are expected

to rise by 3.6 per cent.

Although the capacity additions have outpaced the

incremental demand in the last two years, demand

prospects are healthy for cement in the long term.

Sensing this, the companies are ramping up their

capacities. The cement industry is estimated to have

witnessed a capacity addition of 25.9 million tonnes

per annum (mtpa) in 2011-12. This will envisage an

investment of Rs.8,976 crore. During 2012-13, an

incremental capacity of 24.6 mtpa is expected to come

on stream in the industry. The capacity expansion will

gain momentum in 2013-14. The industry is expected

to add 35.6 mtpa of capacity. This will take the

installed capacity in the industry over 400 million

tonnes by 2013-14.

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Cement prices in Kolkata and Mumbai market rose

sharply in March 2012. This is due to rise in costs.

As per the dealers, the rise in railway freight

charges and the rise in excise duty has forced them

to undertake price hikes. Although the demand has

improved, the rise in prices is cost driven rather

than demand. Price of a 50 kg bag in Kolkata rose

by Rs.18 to Rs.340 in March 2012 when compared to

the preceding month. Cement prices in Mumbai

rose by Rs.11 per 50 bag to Rs.310 during March

2012 when compared to February. Prices in the

southern market have remained more or less stable

in the last six months. A 50 kg bag was priced at

Rs.277 in Hyderabad and it cost Rs.303 in Chennai

during the month. As per CMIE prices are expected to remain high in the coming months. The rise in prices is due to

higher costs which are not expected to come down in the coming months. Prices will also be supported by demand

which is showing signs of improvement.

Developments in the domestic environment and a huge number of infrastructure projects have created an unforeseen

demand for cement consumption in India, which is bound to increase manifold in the coming years. The cement

industry’s profits and profitability are estimated to have improved in 2011-12. Its profit margins are likely to have

expanded by 60-70 basis points during the year. The industry is estimated to have ended the year 2011-12 with a net

margin of 8.3 per cent. Sales are estimated to have grown by 19.8 per cent in 2011-12. Profits are estimated to have

grown by 22-26 per cent in 2011-12.

The improvement in demand that started in the second half of 2011-12 is expected to continue in the coming two years

as well. Thus, despatches are expected to grow by 7-8 per cent per annum during 2012-14. Demand from infrastructure

sector and housing segment (especially rural housing) is expected to rise and aid the growth in despatches. Unit

realisations are expected to average higher by 4-6 per cent per annum during these two years. Thus, sales are expected

to grow by 12 -14 per cent per annum during 2012-14. Aggregate profits are also expected to grow by healthy 15-17 per

cent during this period.

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Strategic geographical location

The Company has built a large network of over 7,800 dealers

and 25,000 retailers across 24 states in India. Its reach and

penetration helps the Company to manage the last mile

connectivity across its markets and gives it a strong position in

its core rural and semi-urban markets. ACL has about 80% of its

total capacity located in West and North and Central regions of

the country where supply is less than demand. ACL has

marginal presence in Southern India which is oversupply

region. The Company’s network of port, bulk terminals and bulk

cement ships on the West coast has supported a sustainable

strong market position in Mumbai, Surat and Cochin.

Mangalore Bulk Cement Terminal would further strengthen this

position from third quarter of 2012, when it is expected to

commence its commercial operations. New plants, Nalagarh and

Dadri, are still in the process of achieving full capacity potential.

Capacity expansion plans

ACL plans about Rs. 1800 crores worth of capital expenditure

during the years 2012 & 2013 which is proposed to be financed

by internal accruals. The company has plans to set up a 2.2

million tonnes clinkerisation unit in Nagaur district of

Rajasthan. Feasibility study for the project has been completed

and environmental clearance too has been obtained. A new Bulk

Cement Terminal (BCT) is under construction at Mangalore

which is expected to commence operations in the third quarter

of 2012. This BCT would mark ACL’s footprints in south India.

A new brown field expansion project has been initiated at

Sankrail Grinding Unit in the Eastern region which would add

0.8 million tonne grinding capacity to the unit. The Company

has formed a JV company with IST & Larfage and hold 27.27%

of shareholding in it. The JV is allotted a coal block in the State

of Maharashtra for captive mining to meet its coal requirements.

The JV is in the process of obtaining various statutory clearances

such as mining lease, environmental clearance, forest clearance

etc. The opening of the mine and coal production is expected to

commence from the first quarter of the year 2015.

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Strong volume growth

Company’s domestic cement sales grew by 5.4% to 20.54 million tonnes in CY11 as compared to 19.49 million tonnes

achieved in 2010. Total cement sales (including exports) increased by 4.5% on YoY basis to 20.91 million tonnes as

compared to 20.00 million tonnes achieved in 2010. The Company’s clinker sales grew by 58% on YoY basis to 0.54

million tonne as compared to 0.34 million tonne achieved in 2010. Net sales for CY11 rose by 15.2% at Rs.8515 crore

backed by increased volumes and improved realizations. Average sales realization improved by around 10% to Rs.

3960 per tonne versus Rs. 3600 per tonne in 2010. The Company has maintained its market share of around 9.5% on

pan-India basis, despite the prevalent challenging environment.

In the North region, domestic cement sales of the Company grew by 4.7% to 8.07 million tonnes as compared to 7.71

million tonnes achieved in 2010. Clinker sales during the year 2011 were 0.12 million tonne. In the East region, ACL

sold 3.95 million tonnes in domestic market, higher than 3.72 million tonnes in 2010 by 6.2%. Clinker sales growth was

at 39%, i.e. from 0.30 million tonne in 2010 to 0.42 million tonne in 2011. In the West / South region, Company’s

domestic cement sales grew by 5.7% to 8.52 million tonnes as compared to 8.06 million tonnes achieved in 2010.

However, Cement exports declined by 27.5% to 0.37 million tonne in 2011 as compared to 0.51 million tonne achieved

in 2010.

Source: Annual report

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Standalone Profit & Loss Account Rs. Crore

Particulars CY09 CY10 CY11 CY12E CY13E

Net sales 7076.87 7390.21 8514.52 10217.42 12056.56

Growth 4.43% 15.21% 20.00% 18.00%

Expenditure 5209.99 5566.59 6608.44 7846.98 9187.10

EBITDA 1866.88 1823.62 1906.08 2370.44 2869.46

Growth -2.32% 4.52% 24.36% 21.05%

EBITDA margin 26.38% 24.68% 22.39% 23.20% 23.80%

Other income 255.84 247.60 318.82 337.17 361.70

Depreciation & Amortization 296.99 387.19 445.15 483.98 531.91

EBIT 1825.73 1684.03 1779.75 2223.63 2699.25

EBIT margin 25.80% 22.79% 20.90% 21.76% 22.39%

Interest 22.43 48.69 52.63 59.65 67.22

PBT 1803.30 1635.34 1727.12 2163.98 2632.03

Tax 584.93 398.26 474.01 598.39 718.06

PAT 1218.37 1237.08 1253.11 1565.60 1913.96

Minority interest/Share of JV/Associates 0.00 0.00 0.00 0.00 0.00

Adjusted PAT 1218.37 1237.08 1253.11 1565.60 1913.96

Growth 1.54 1.30 24.94 22.25

Net Profit margins 17.22 16.74 14.72 15.32 15.87

Extraordinary item 0.00 26.53 (24.25) 0.00 0.00

Reported PAT 1218.37 1263.61 1228.86 1565.60 1913.96

Equity Capital 304.74 305.97 306.87 306.87 306.87

Res. & Surplus 6165.92 7022.79 7730.46 8,759.03 9,905.82

Equity Shares 152.37 152.99 153.44 153.44 153.44

EPS 8.00 8.09 8.17 10.20 12.47 Ratios


Return on Equity 18.83 16.88 15.53 17.21 18.68

Debt/Equity 0.03 0.01 0.01 0.01 0.01

Asset turnover 0.80 0.72 0.74 0.80 0.84

Current Ratio 1.14 1.31 1.42 1.44 1.50

Cash per share 5.78 11.43 13.50 15.00 17.47

Book value per share 42.47 47.91 52.59 59.30 66.77

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Balance Sheet

Rs. Crore


Share Capital 304.74 305.97 306.87 306.87 306.87

Reserves & Surplus 6165.92 7022.79 7730.46 8,759.03 9,905.82

ESOP 0.24 1.34 32.11 32.11 32.11

Shareholders’ funds 6470.90 7330.10 8069.44 9098.01 10244.80

Borrowings 165.70 65.03 49.36 59.06 73.07

Minority Interest 0.00 0.00 0.00 0.00 0.00

Deferred tax Liability 485.84 530.88 643.60 643.60 643.60

Sources of funds 7122.44 7926.01 8762.40 9800.67 10961.47

Gross block 6,373.74 8,905.87 9,747.58 10755.18 11820.16

Accumulated Depreciation 2,784.09 3,151.07 3,515.83 3,999.81 4,531.92

Net block 3589.65 5754.80 6231.75 6755.37 7288.24

Capital work in progress 2,564.82 803.65 531.99 644.50 732.85

Investments 727.01 625.95 864.31 1,086.27 1,285.56

Projects in progress 0.00 0.00 0.00 0.00 0.00

Inventories 683.24 901.86 924.97 1,010.99 1,141.83

Sundry debtors 152.20 128.18 240.85 301.15 352.48

Cash and bank balance 880.68 1,748.17 2,071.23 2,301.61 2,680.81

Other current assets 10.17 16.57 23.66 34.42 44.68

Loans and advances 253.05 340.55 567.61 653.92 744.67

Total current assets 1,979.34 3,135.33 3,828.32 4,302.07 4,964.47

Deferred tax asset 0.00 0.00 0.00 0.00 0.00

Current liabilities and provisions 1,741.09 2,394.18 2,694.24 2,987.55 3,309.64

Net current assets 238.25 741.15 1,134.08 1,314.52 1,654.82

Misc exp 2.71 0.46 0.27 0 0

Uses of funds 7,122.44 7,926.01 8,762.40 9,800.67 10,961.47

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Quarterly Financial Highlights

Rs. Crore

Particulars Q1CY12 Q1CY11 Q4FY11 YoY% QoQ%

Revenues 2660.93 2222.47 2357.68 19.73 12.86

Expenditures 1888.84 1595.47 1908.06 18.39 (1.00)

Operating Profit 772.09 627.00 449.62 23.14 71.72

Adjusted Net Profit 591.35 407.48 326.65 45.12 81.03

OPM% 29.02 28.21 19.07 81bps 995bps

NPM % 22.22 18.33 13.85 389bps 837bps

EPS* 3.85 2.65 2.13 45.28 80.75 *Adjusted for current no. of equity shares

Past Price movement of the stock

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