Ambuja Cements poised for highest volume growth: Nomura upgrades to 'Buy'

Japanese brokerage firm Nomura has upgraded India's second biggest cement company Ambuja Cements to Buy with a target price of Rs 780, an upside of 17 per cent, raising their  target multiple to 19x (from 14x) to factor in the company’s expansion juggernaut. 

This, the brokerage said, comes on the back of strong capacity expansion that the cement company is witnessing, coupled with entry into newer markets, above industry growth and cost optimisation measures. 

Ambuja is in the process of adding 24 metric tonne capacity by fiscal year 2025-26 through a series of organic and inorganic expansions. Nomura said that its estimates for the company's volumes and earnings before interest, tax, depreciation and amortisation fromFY24 to FY26 are slightly above Ultratech’s.

“We now model Ambuja on a consolidated basis, instead of standalone, and do not incorporate Penna’s capacity yet. Our FY25/26F Ebitda estimates are Rs 72/103 billion; our FY26F Ebitda is in line with the Bloomberg consensus estimate. As a result, we raise our one-year forward EV/EBITDA multiple to 19x (vs 17x for Ultratech) to reflect further capacity expansion (Penna), and increase our TP to Rs 780 (from Rs 500),” the brokerage said in a recent report. 

Volume growth unleashed

Ambuja cements is ready for another round of inorganic expansion with a possibility of highest volume growth in the industry, the brokerage said while highlighting that Ambuja is in process of acquiring Penna Cement with a 9 metric tonne (MT) per annum capacity, implying a 14 per cent capacity compound annual growth rate (CAGR) over FY24-26F against 6 per cent and 9 per cent for the industry and Ultratech, respectively. 

According to estimates by analysts, Ambuja should have 106 MT capacity by FY26F, including Penna. In their view, Ambuja has 20-25MT brownfield optionality suggesting around 10MT inorganic expansion to meet its ambitious capacity target of 140MT by FY27F. 

“Based on our analysis, we mention a few potential targets in Fig. 24 . Excluding Penna, we expect a volume CAGR of 13 per cent over FY24-26F, the highest in the industry,” Jashandeep Singh Chadha of Nomura wrote in the report. 

Source: Nomura

Acquisitions to cement position 

After the completion of Penna’s acquisition, Ambuja is set to become the third-largest player in Southern India behind only Ultratech and Ramco. Sanghi and Penna also provide brownfield optionality to Ambuja with 823MT and 610MT of limestone reserves, respectively, the analyst said. 

Further, Chadha said these acquisitions should offset ACC’s lack of brownfield optionality. ACC, formerly known as the Associated Cement Companies, is an Indian cement producer based in Mumbai. It operates as a subsidiary of Ambuja Cements and a part of the Adani Group.

Moreover, lower heat consumption and higher share of green power may result in cost savings for Ambuja Cements. 

“We believe a reduction in heat consumption and a higher share of green power mix (30 per cent by FY26F) should result in a minimum of INR60/t cost savings, which when coupled with higher share of domestic coal, AFR, group synergies should bring about INR200 savings in P&F cost/t by FY26F. We expect Ambuja to reduce its operating cost/t by INR300 by FY26F,” the brokerage firm said.