Ambuja Cements. Rating: Target price: EPS: Rating CMP. Target BUY. Rs.225. Rs. 195

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1 : price: EPS: How does our one year outlook change? We maintain our positive stance on ACEM. We expect ACEM to be a big beneficiary of the restructuring of LafargeHolcim s global operations. The long pending merger approval with ACC will lead to gradual re-rating in the stock and also aid in realising synergies over the next two to three years. ACEM s balance sheet remains healthy despite Rs. 35bn of cash outflow expected to fund for ACC s 50% stake. Expected net cash is Rs. 28bn by end of CY15E. We expect ACEM to generate cumulative operating cash flows to the tune of Rs bn over CY16-CY17E. We expect EBITDA CAGR of 26% over CY15-CY17E, factoring in volume and realisations growth of 4% and 2% respectively. Ambuja remains Indirect beneficiary through higher volume growth in ACC(commissioning of plant in Eastern region) and synergy realisations. ACC forms ~25% of ACEM s target price in our SoTP. ACEM is currently trading at 10.7x CY17E EBITDA on par with five year average. We value ACEM based on 13x CY17E EBITDA, which is ~20% premium to last five year average. We believe ACEM to trade at premium to historicals on favorable regional mix, balance sheet strength, and potential cost savings post merger with ACC. ACEM s CY15 EBITDA is lowest in the last decade and with industry utilisations likely to bottom out by 2HFY17E and costs deflation, we expect significant recovery in earnings going ahead. Maintain rating on the stock with a TP of Rs. 225/share. How does our 3 year Outlook change? We remain positive on the prospects of the cement industry over a three year outlook. Expect industry utilisations to bottom out by 2HFY17E and thereon see a structural shift upwards led by declining pace of capacity additions coupled with demand pick up from the decade low growth seen in FY15 and FY16. Incremental demand will be higher than incremental supply from FY17E, which will result in pricing power and thereon margin expansion ACEM with a capacity of 29mt spread across favourable regions, will be one the biggest beneficiary of demand recovery and structural improvement in utilisations. Financial summary Year 4QCY15 Update Promoters 50.3 Institutions 39.8 Public 9.9 (%) 1m 3m 12m ACEM 0% -26% Sensex - -10% -20% Key estimate revision Revenues (Rs. mn) CY16E EBITDA (Rs. mn) PAT (Rs. mn) EPS CY17E Old New Change Old New Change Revenues 100,957 98, % 110, , % EBITDA 17,240 17, % 22,937 22, % Margin % 17.1% 17.7% % PAT 13,407 12, % 17,964 17, % PAT margin % 13.3% 12.9% 16.3% 16.0% EPS % % All figures in Rs. mn, except EPS, which is in Rs. Bloomberg Shares o/s Market Cap 12 th Feb, 2016 ACEM IN 1,552mn Rs. 300bn 52-wk High-Low Rs m Avg. Daily Vol 21,50,024 Index BSE 100 EV/EBITDA (x) EV/t (Rs/t) CY14 99,109 18,612 14, ,704 CY15 93,683 14,384 8, ,298 CY16E 98,423 17,399 12, ,530 CY17E 107,459 22,779 17, ,254 GIRISH CHOUDHARY girish@sparkcapital.in VIJAYARAGHAVAN SWAMINATHAN raghavan@sparkcapital.in GAURAV NAGORI CFA gaurav@sparkcapital.in Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1

2 Quarterly Financial Statements Standalone financial results Rs. mn \ Period Dec-15 Dec-14 y-o-y Growth Sep-15 q-o-q growth CY14 CY15E y-o-y growth Revenues 23,558 23, % 20, % 99,109 93, % Material cost 3,271 2, % 1, % 9,474 10, % Employee cost 1,399 1, % 1, % 5,816 5, % Freight costs 6,200 5, % 5, % 18,589 18, % Power & Fuel costs 4,479 5, % 4, % 22,652 20, % Other expenditure 5,167 4, ,003 42,578 38, % EBITDA 3,042 3, % 2, % 18,612 14, % Margins 12.9% 14.0% 14.1% % Other income 1, % ,962 4, % Interest % % % Depreciation 1,641 1, % 1, % 5,095 6, PBT 2,287 2, % 2, ,834 11, % Tax 1,187 (438) % % 2,871 3, % Effective tax rate 51.9% -15.4% 26.2% 16.1% 31.1% Exceptionals Reported PAT 1,100 3, % 1, % 14,964 8, % Margins 5% 14% 7% 15% 9% Adjusted PAT 1,100 3, % 1, % 14,964 8, % EPS (Rs.) % % 14,964 8, % Page 2

3 ,403 3,591 3,651 3,597 3, ,768 3,755 3,675 3, ,142 4,353 4,634 4,557 4,365 4,190 4,465 4,276 4,268 Ambuja Cements Quarterly focus charts Volume trends Realisation trends % 3% 2% 2% 2% 1% -10% Volumes (mt) % Y-o-Y growth 4% 0% -4% - -12% 5,000 4,500 4,000 3,500 11% 5% -3% 2% 3% -6% -10% Realisations (Rs./t) % Y-o-Y growth 16% 12% 4% 0% -4% - -12% Total Cost/t trends EBITDA/t trends 3,900 12% 1,000 3,800 3,700 3,600 3,500 3,400 3% 5% 5% 6% 4% 800 3,300 3,200 3,100 3,000 1% 0% -1% -4% Total Cost (Rs./t) % Y-o-Y growth EBITDA (Rs./t) Page 3

4 Financial Summary Page 4

5 Spark Disclaimer Rs. Ambuja Cements Ltd 3 Year Price and History Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Price Report Date Price Reco. 18/Dec/ Buy 30/Oct/ Add 29/Jul/ Add 04/May/ Buy 16/Mar/ Buy 19/Feb/ Buy 03/v/ Buy 24/Jul/ Buy 25/Apr/ Sell 21/Mar/ Sell 20/Mar/ Sell 10/Feb/ Sell 12/Dec/ Sell Report Date Price Reco. 24/Oct/ Sell 17/Sep/ Reduce 25/Jul/ Reduce 03/May/ Add 28/Mar/ Buy 11/Feb/ Buy 29/Oct/ Buy Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Absolute Interpretation Stock expected to provide positive returns of >15% over a 1-year horizon ADD Stock expected to provide positive returns of >5% <15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% -10% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Page 5

6 Disclaimer (Cont d) This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of Interest Statement Analyst financial interest in the company Group/directors ownership of the subject company covered Investment banking relationship with the company covered Spark Capital s ownership/any other financial interest in the company covered Associates of Spark Capital s ownership more than 1% in the company covered Any other material conflict of interest at the time of publishing the research report Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months: Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services Products or services other than those above In connection with research report Whether Research Analyst has served as an officer, director or employee of the subject company covered Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; Yes/ Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst s personal views about any and all of the subject securities or issuers; and no part of the research analyst s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations. Page 6