Ambuja Cements: Holcim's stake sale is a crucial near-term trigger

With margins seen under pressure and analysts' target price of Rs 350-410, the gains otherwise are limited

The Jan-Mar 2022 results of Ambuja Cements (Q1 because the company has a December closing) marginally beat the street consensus expectations. The company guidance also indicates that the standalone capacity expansion is on track. Most analysts however, see a marginal upside from the current levels, given margin pressures.

The market is however waiting on the outcome of Holcim’s attempts to sell off its controlling holding in Ambuja Cements where it holds 63 per cent stake, and Ambuja in turn, holds over 50 per cent in ACC. Several groups are said to be involved in negotiations, with reports saying the Adani Group is among the front-runners. If the deal does go through, there would be an immediate impact on valuations depending on the terms. Taken together, the market value of the two cement majors would easily exceed Rs 75,000 crore.

In standalone terms, Ambuja has recovered from a poor Q4 (Oct-Dec 2021) and it delivered a positive surprise in terms of sequential cost–cutting and higher EBITDA/ tonne realisations. However, in YoY terms, the results were poor but the market was expecting worse.

The standalone revenue was Rs 3,930 crore, while EBITDA was at Rs 790 crore and PAT was at Rs 490 crore. In YoY terms, revenue is up 8 per cent while EBITDA is down 19 per cent and PAT is down over 25 per cent. In QoQ terms, the revenue was up 5 per cent but EBITDA was up 39 per cent and PAT was up 56 per cent after adjustments for extraordinary items. Volumes were up by 4.5 per cent QoQ with averaged EBITDA/ tonne rising to Rs 1,055 versus Rs 793 QoQ and down versus Rs 1,362 (YoY).

Key costs showed 40 per cent rise YoY for power and fuel but this was down 8 per cent QoQ. Employee Expenses were down 9.5 per cent YoY and down 14 per cent QoQ. Other Expenses were down 15 per cent QoQ and COGS (Costs of goods Sold) was up 54 per cent YoY and up 43 per cent QoQ. While the cost controls have been commendable, Power and Fuel costs could escalate further through April-June 2022 and margin pressures are expected to continue. Freight costs are also expected to remain high.

The management is targeting 50 MTPA capacity in the “near term” with no exact timeline, but capacity expansions of 3.2 MTPA clinker at Chhattisgarh, 3 MTPA grinding unit (GU) at Bihar and 3.2 MTPA GU at West Bengal and a 1.5 MTPA expansion in Ropar. Capacity is expected to reach 40 MTPA (from around 33 MTPA) once Ropar is completed. The Capex projections are in the range of Rs 3,810 crore. It has an Enterprise Value (EV to EBITDA ratio of around 18x, which is higher than its long-term valuation of around 13x. The Balance Sheet is quite strong with a negligible Debt:Equity ratio and a Current Ratio of 1.1.  

Most analysts tracking the sector have downgraded earnings projections and value the stock in the range of between Rs 350 to Rs 410. Given a current price of Rs 372, there’s not much upside even at the top of the range. However, the strategic implications of a sale if one comes through could lead to either a sharp upgrade/ downgrade of the assigned EV/ EBITDA ratios and change the valuations.