Cost optimisation drives profit growth in Indian cement industry: IIFL Capital Services

3 Aug 2023 , 10:43 AM

Although Ambuja Cement’s consolidated volumes grew by only 9% YoY (in line with expected industry growth, but lower than large peers), sharp improvement in profitability drove Ebitda beat. Lower power and fuel costs resulted in Ebitda/t improving by 23% YoY to Rs1,082; resulting in Ebitda growth of 50% YoY and 35% QoQ to Rs16.7bn (25% beat). Between the 2 companies, ACC’s Ebitda/t improved by 47% QoQ to Rs822/t. On future growth, company reiterated its capacity target of 140mtpa by FY28 and cost optimisation of upto Rs400/t through group synergies and efficiency capex. Analysts of IIFL Capital Services upgrade their FY24-25 Ebitda by 7-8% to account for Q1 beat. Concerns around likely related party transactions to weigh on stock valuations; thus, comfort around the same and visibility on growth through capacity addition and cost optimisation is must for re-rating. Analysts of IIFL Capital Services maintain ADD on Ambuja Cements (valued at 12x 2YF Ebitda, TP of Rs480) and BUY on ACC (valued at 8.5x 2YF Ebitda, TP of Rs2,100). 

Inter-company volumes mask underlying performance: 

Increasing share of inter-company volumes under the MSA between ACC and Ambuja, as well as increasing difference in combined standalone Ebitda and consol. Ebitda is making standalone numbers analysis less important. For instance – standalone volumes of ACC and Ambuja grew by 23% YoY each, however consol. volumes were up only 9% YoY. This is because of inter-company volumes (3.1mn MT in Q1FY24) which now accounts for 20% of consol. volumes vs 6% YoY. Further, combined Ebitda of two standalone entities is Rs17.2bn vs consol. Ebitda of Rs16.7bn – a difference of Rs506mn. A year ago, the difference in Ebitda use to be negligible. Thus, consolidated numbers reflect true and more relevant picture now. 

Beat on better profitability: 

Ambuja’s consolidated Ebitda was up 50% YoY and 35% QoQ to Rs16.7bn – 25% higher than estimates. The strong performance was driven by higher-than-expected reduction in power and fuel costs. Increasing share of captive coal mine, higher share of WHRS in power mix and realisation of group synergies are driving cost optimisation. Analysts of IIFL Capital Services note that total operating cost fell by 7% YoY and 4% QoQ to Rs4,575/t. This, coupled with flat realisations QoQ, drove profitability. Ebitda/t was up 37% YoY and 23% QoQ to Rs1,082/t. As such, consolidated volumes (ex of inter-company sales) grew by 9% YoY– in line with the expected Q1 industry growth and analysts of IIFL Capital Services expectations. On a combined basis, company operated its plants at 91% utilisation (68mn MT capacity) vs 83% YoY and QoQ. 

Targets to be 140mtpa by FY28: 

Management reiterated its target to achieve 140mnt cement capacity by FY28 through incremental 72mtpa grinding capacity, backed by additional 40mnt clinker capacity. Existing capacity addition plans ensure Ambuja (consol.) would achieve 83mnt cement by FY25. Further, management disclosed new grinding locations at Jalgaon, Pune and Amravati (2mmt each) to feed from Chandrapur clinker unit. Further, kiln ordering of Bhatapara and Chandrapur units (4mmt each) has been completed. Additionally, Ametha clinker line (3.3mt) is expected to commission from Q2FY24 in ACC. In all, it has total capex plan of Rs460bn – of which, Rs70bn would be spent in FY24. 

Targets cost optimisation up to Rs400/t: 

Company targets to reduce costs by Rs400/t over two years. It expects optimisation in Energy Costs, Logistics cost, and other expenses through Group synergies and efficiency capex. Some of the initiatives, as shared by the company on energy cost savings are: 1) Increasing AFR usage to 30%. 2) Increasing WHRS capacity to 175MW (vs 90MW now). 3) Increasing dependence on captive coal mines. 4) Improving blending ratio. On freight costs, focus is on increasing direct despatches (52% in Q1) and improving rail mix (Q1: 29%). Also, the company targets to reduce road lead distance to 100kms from 170kms now. Group level synergies in procurement and infrastructure would aid in attaining cost leadership. 

Upgrade estimates by 7-8%; visibility on cost optimisation and new capacity addition to drive re-rating: 

Analysts of IIFL Capital Services upgrade their FY24-25 Ebitda estimates for both ACC and Ambuja by 7-8% to account for Q1 beat. Resultantly, analysts of IIFL Capital Services also increase their target price. They value Ambuja Cement at 12x 2YF Ebitda, while ACC at 8.5x – given Ambuja’s superior profitability and better growth potential as bulk of new capacity additions are through Ambuja Cements. Concerns around likely related partly transactions would continue to weigh on stock valuation, until clarity on its value proposition is established. Analysts of IIFL Securites maintain ADD on Ambuja Cements and BUY on ACC (relatively inexpensive valuations).