ACC, Ambuja stocks gain about 3-5% each on improving growth outlook

Expansion in profitable regions expected to improve growth visibility and allay concerns on market share gain

The announcements on capacity expansions by Ambuja Cement and its subsidiary ACC have been cheered by the street. “Both stocks have gained about 3-5 per cent each over past two trading sessions on improving  growth outlook”. 

The capacity expansions should allay Street concerns on expansion and market share gains of these companies. Also, these expansions are primarily in the profitable regions of north and central India, where the industry’s clinker utilisations run at over 85 per cent and capacity, hence, are perceived as positive by analysts.

More important, the improving growth visibility would mean these companies could see valuation re-ratings, they feel. Though the coming (calendar) year estimates for these companies might not see major upgrades, the benefits should start accruing thereafter.

Overall, analysts feel the stated expansion would impart the much-needed volume growth visibility, with the bulk of the new capacity in the lucrative regions. The announcement also reflects LafargeHolcim’s (the Swiss-based parent entity’s) commitment to the India business, which should rub off on the valuations.

For Ambuja, the announced expansions mean its clinker and grinding capacities will increase to an annual 21 million tonnes (mt) (18 per cent increase) and 31.4 mt (six per cent increase), respectively. It will be adding annual clinker capacity of 1.4 mt at Marwar Mundwa in Rajasthan to the project for new capacity of 1.71 mt announced in February. While total clinker capacity will rise by 3.1 mt, the company also announced a 1.8 mt grinding capacity at the same location.

Further, to control its operating cost, Ambuja will be setting up a 30 Mw captive power plant and 15 Mw waste heat recovery system at the upcoming plant. These will make the unit fully self-sufficient in electricity, at lower cost versus grid supply, say analysts. They add that with a large standalone cash balance of about Rs 35 billion on the books at the end of calendar year 2018 (CY18) and annual operating cash flow of Rs 20 billion during CY19/20, Ambuja is well placed to implement the capital expenditure through internal accrual.

The gains would come in the longer term, since the expansion projects are likely to be completed in CY2020. Say analysts at Centrum Broking, “Ambuja taking up expansion projects is a welcome move, as it had lost market share over several years, in the absence of a capacity increase.” They also maintain their positive stance on expectation of cost moderation from the material supply agreement (MSA) with subsidiary ACC.

Notably, the input cost inflation faced by most cement players is expected to lesses with the recent fall in coal and diesel prices. Analysts at Edelweiss feel the expansion plan is a positive for Ambuja and a further commitment to maintain market share could drive a valuation multiple upgrade.

For ACC that was benefiting from completed capacity expansion at its Jamul plant in Chhattisgarh, there were still concerns on growth, given the lack of a next set of expansion plans. Hence the announcements on a new integrated cement plant in Madhya Pradesh, with two grinding units in Uttar Pradesh, was welcome.

The clinker capacity of three mt annually (mtpa) and other capacity of 1 mtpa in MP will be augmented by two grinding units of 1.6 mt and 2.2 mt in UP. The company will also be setting up a 1.1 mtpa grinding facility at the existing location in Sindri, Jharkhand. Thus, overall, ACC has said it would be adding 3 mtpa in clinker and 5.9 mtpa in overall cement capacity over the next three years.

This should put to rest the concerns over capacity expansion. Binod Modi at Reliance Securities says although the timeline about the commissioning of this capacity is not clear, the expansion will ease the concern of capacity overhang for ACC and could lead to valuations being re-rated.