Ambuja-ACC FY23 update: Subdued year; visibility on growth plans to drive re-rating

3 May 2023 , 03:11 PM

 

	Recommendation	Target Price
ACC	Buy	Rs. 2,150
Ambuja	Add	Rs. 425

 

EBITDA/t improved by 18% QoQ to Rs 880, driven by lower fuel prices. For FY23, consolidated volumes grew 4% YoY (annualized growth) – lower than peers’. Balance sheet has seen improvement in the last quarter – cash balance stood at Rs. 11.5 billion versus Rs. 9.5 billion last quarter. Analysts at IIFL Capital Services have trimmed their FY24-25 ACC EBITDA estimates by 3-4%, as they account for lower profitability. On base case (modest assumption compared to management expectations), both stocks are trading at a discount to their long-term valuations – Ambuja trades at 11x FY24 estimated EBITDA (8% discount), while ACC trades at 10x FY24 estimated EBITDA (25% discount).

Consolidated volumes down 2% YoY in Q4FY23

In Q4FY23, both Ambuja and ACC reported 8-10% YoY volume growth on a standalone basis. However, on a consolidated basis, volumes are down 2% YoY to 14.1mn MT. Higher volumes under MSA – up 213% YoY and 50% QoQ to 2.5mn MT — resulted in divergent trend between standalone and consolidated numbers. Analysts at IIFL Capital Services believe the muted volumes growth at consolidated level could be given: 1) 10% of its capacities in Himachal Pradesh (HP) not being operational for 50 days in Q4 (dispute with transporters). 2) Downtime of 15-20 days in one of the plants in the eastern region. Plant utilization stood at 83% versus 87% YoY. Consolidated EBITDA per ton was up Rs 133/t, or by 18% QoQ, to Rs 880 – lower power and fuel costs led to margin improvement (down 10% QoQ) despite weak realizations. Fuel efficiency was partly aided by the lucrative imported coal contract signed in September 2022. On a standalone basis — improvement in EBITDA/t was lower for ACC due to: i) Higher impact of HP plant closure. ii) Geographical mix.

Subdued year versus peers

As against double-digit volume growth for UTCEM and Dalmia Bharat; Ambuja’s consolidated volumes (including ACC but excluding inter-company transaction) grew by 4% YoY in FY23 (5-quarter growth annualized). No significant capacity additions (~80% utilization), management change and HP issues impacted overall volume growth. Ambuja’s consolidated EBITDA/t fell 36% YoY to Rs 741 – sharp increase in costs of power, fuel and raw material led to fall in profitability. On a standalone basis – Ambuja’s volumes grew by 12% YoY – 2x to that of ACC. Also at Rs 850, EBITDA/t was 70% higher to ACC. Higher freight and employee costs in ACC moderate its EBITDA/t.

 

Balance sheet improved in the March 2023 quarter

Cash balance at FY23-end stood at Rs. 11.5 billion versus Rs. 9.5 billion, as on December 2022. Improvement in cash balance (Rs. 2 billion) in the quarter was driven by better profitability, working capital efficiency and slowdown in capex (in Ambuja, EPC contract was foreclosed leading to a recovery of Rs. 20 billion advance payment). In FY23, on a consolidated basis, Ambuja spent Rs. 40 billion on capex and another Rs. 35 billion was blocked in working capital; however, this was offset by Rs. 50 billion equity infusion by promoters against warrant issues (Rs. 419/sh) in October 2022.

Medium-term growth plans intact

Over the next 5 years, Adani targets to double its cement capacity to 140mtpa and add 40mtpa of clinker capacity (90% through brownfield expansion). So far, the company has shared plans for 11mtpa cement capacity and 15mtpa clinker capacity, which it expects to add over the next 2-3 years. For FY24, the company expects to complete the Ametha project under ACC, but thereafter, capacity additions are likely to pick up. In all, it has a total capex plan of Rs. 460 billion — of this, Rs. 70 billion would be spent in FY24. The company is confident of funding this capex plan through internal accruals as it expects volumes to grow at 17% p.a., and improve EBITDA/t by Rs. 400-500 to Rs. 1,470 by 2028. For FY24 too, the company believes it could bring cost efficiency of Rs. 250-300/t, driven by group synergies.

Stocks trade below historic valuations

Following the allegations of financial irregularity by Hindenburg Research in January 2023, Adani Group stocks had corrected. As per media reports, Adani has repaid US$0.7 billion of the US$4.5 billion bank loan taken for Ambuja-ACC acquisition. However, refinancing of the balance loan (due in another 12-18 months) and 100% pledge on promoters’ share in Ambuja-ACC have weighed on stock valuations. Analysts at IIFL Capital Services are still not building the company guidance on volume growth and margin expansion, as they await more visibility on the same. In base case, they expect AmbujaACC volumes to grow in line with industry (8-9% p.a.) and EBITDA/t to improve by Rs. 350 to Rs. 1,100/t by FY25, aided by cost tailwind. On their base estimates – Ambuja is trading at 11.2x FY24 estimated EV/EBITDA versus long-term average of 12.1x; while ACC trades at 10x FY24 estimated EV/EBITDA versus long-term average of 13.5x.