Weak Q2; price hike to aid profitability in cement sector: IIFL Capital Services

2 Nov 2023 , 12:07 PM

Ambuja Cement (ACEM) Q2FY24 consolidated Ebitda was up 3x to Rs13bn, however the performance was below analysts of IIFL Capital Services expectation owing to lower than industry volume growth. Company saw market-share loss in Q2 as its operations were impacted by heavy monsoons in July. The profitability is likely to see an improvement in H2 driven by pan-India price increases in last 2 months. This is leading to a 5-6% increase in consol Ebitda over FY24-26. Company’s cash position remained steady in H1FY24; however analysts of IIFL Capital Services expect it to decline in H2 given higher capex and Sanghi acquisition. Infusion of balance warrant money will propup cash balance. Both ACC and Ambuja trades inexpensively at 10x and 12x respectively at a discount to large peers. 

Miss estimates on weak volume growth: 

ACEM’s consol volumes grew by 2% YoY (fell 15% QoQ) to 13.1m MT, lower than analysts of IIFL Capital Services expectation in-line with industry growth (+10% YoY). Management shared that heavy monsoons in Himachal Pradesh and Central India in July resulted in subdued growth in Q2FY24. Volumes have picked-up since August 2023, and company expects to grow in-line with industry in Q3FY24. On standalone basis, ACC and Ambuja volumes grew by 18% YoY and 8% YoY respectively, but this included 2.4m Mt of MSA volumes (inter-company sales). Adjusting for this volumes for ACC remained flat YoY, while it decline for Ambuja Cement. 

Profitability declined sequentially on negative operating leverage: 

The Ebitda per tonne for ACEM (consol) declined by 8% QoQ to Rs995/t. The decline was largely on account of negative operating leverage as volumes declined by 15% QoQ. Resultantly operating expenses were up 2% QoQ to Rs4,681/t despite 5% decline in power and fuel costs. The realisation were flat QoQ as expected. On YoY basis, profitability improved significantly – up 3x to Rs995/t owing to lower power and fuel costs (down 33% YoY) as well as part realisation of cost optimisation initiatives (other expenses are down 14% YoY or savings of Rs130/t). Company shared that of the targeted Rs400/t savings it would have realised Rs100-125/t of savings and balance would accrue over the next 2 years. As such, company is targeting an Ebitda/t of Rs1450- 1500 vs. analysts of IIFL Capital Services estimate of Rs1120 in FY24.

140m MT capacity target intact; additions to be back ended: 

ACEM reiterated its plans to reach 140mnt capacity by FY28 vs. 68m MT now. Company has shared plans to add 20m MT capacity addition of which 12m Mt is targeted in FY25 and another 7m Mt in FY26. This does not include Sanghi acquisition (likely to be completed in Q3FY24) which could add another 10m MT capacity over the next 12-15 months. Thus company is confident of achieving 100m MT capacity by FY26. Further, management shared that they have already identified the balance 40m MT that would be commissioned through FY28, however details around the same would be shared as and when company secures necessary approvals. Currently, equipment orders have been placed for Bhatapara, Maratha, Sankrail and Farakka and civil construction is already started at Bhatapara. 

Cash balance steady in H1FY24; capex intensity to increase in H2FY24: 

In H1FY24, the consolidated cash and equivalent balance remained steady at Rs117bn vs Rs115bn in Mar-23. Healthy operating cashflows (Rs22.4bn – up 10x YoY) aided by improved profitability partly offset by increased working capital (Rs3bn). This coupled with lower capex intensity in H1FY24 (Rs16bn vs. full year guidance of Rs75- 80bn) drove FCF to Rs10bn in H1FY24. Based on the estimated OCF of Rs60-75bn pa over FY24-26, company can fund its expected capex of Rs60-80bn pa. Inorganic opportunities would increase the capex, however promoters would infuse Rs150bn by FY24/25 for the balance amount of warrants issued in Oct 2022. 

Upgrade estimates to factor in price hikes; trades inexpensively: 

Although, Ambuja results were below expectation, analysts of IIFL Capital Services upgrade their FY24-26 Ebitda by 5-6% as they build-in the sharp price increases seen in last 2 months. They expect Ebitda/t to improve by Rs250-300/t to Rs1300-1350/t in H2FY24 (H1FY24 Ebitda/t was Rs1050) driven by higher realisations and further rationalisation of cost. The volume growth is likely to pick-up only from FY26 as phase-1 of new capacity additions comes through in FY25. Both ACC and Ambuja trade at a discount to other large peers such UltraTech Cement and Shree Cement given inter-company transaction as well as concerns around likely related party transactions. ACC and Ambuja, both trade inexpensively at 9.9x and 12x FY25 EV/Ebitda; on EV/MT- the stocks trade at US$100 and US$140 respectively.