Capacity expansion will boost Ambuja Cements
PremiumAmbuja Cements is taking steps to cut costs, which could boost its ebitda per tonne in the next few years
The cement industry’s pricing and demand pressures have been sore points for shares of these companies lately. Ambuja Cements Ltd is no exception. The company’s shares have declined by about 18% from its September highs on the NSE.
Given that the company has lagged peers on commissioning capacity historically, expansions may help Ambuja Cements clock better volume growth ahead.
In September, the 3 million tonne (mt) clinker and 1.8 mt grinding units at Marwar-Mundwa, Rajasthan were commissioned. This can support cement grinding of 4-5 mt. Currently, Ambuja Cements has a capacity of 31.5 mt. Over the medium term, the company aims to increase its capacity to 50 mt. Successful capacity expansion would help alleviate investor concerns on growth ahead.
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Commenting on the expansion, analysts from Emkay Global Financial Services Ltd said, “[It] provides visibility for volume growth and sustenance of market share over the next few years." The brokerage has modelled a 7.5% volume compound annual growth rate (CAGR) over CY21E-23E. Ambuja Cements follows a January to December financial year.
Further, the company is undertaking various cost-cutting measures, which is expected to boost its ebitda per tonne in the next few years. Ebitda is earnings before interest, taxes, depreciation, and amortization.
It also helps that the balance sheet is robust. “Standalone Ambuja Cements net cash is likely to rise from ₹2,900 crore as at CY20 to ₹7,900 crore as at CY23E. Hence, we see the possibility of higher dividend payout," said analysts from ICICI Securities Ltd in a report on 14 December. They added that standalone Ambuja Cements also enjoys industry leading RoCE / RoE (return on equity) of more than 20%. RoCE is return on capital employed.
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Despite the recent weakness in the stock, Ambuja Cements’ shares have appreciated as much as 46% so far this calendar year. In comparison, the Nifty 100 index has gained 22% in the same span. As such, investors seem to be factoring part of the optimism into the share price. Cement companies in general may face margin headwinds in the December quarter owing to high costs. Also, dealers channel checks indicate that price hikes taken in October and November have been rolled back, which points to weak margins. These factors may keep near-term sentiments muted for cement stocks, including that of Ambuja Cements.
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