May 21, 2012, 01.10 PM | Source: Moneycontrol.com
Motilal Oswal is bullish on Ambuja Cements and has recommended buy rating on the stock with a target of Rs 200 in its May 16, 2012 research report.
Motilal Oswal (more)
“We believe that the worst is over for the Indian cement industry and expect gradual improvement in operating performance. Volume recovery (~8% growth in FY13) coupled with slowdown in capacity addition would drive absorption of excess capacity. While cement prices are likely to remain buoyant at least till 1QFY13, short-term volatility due to seasonality notwithstanding, we expect improvement in cement prices and profitability on an annual basis for the next 2-3 years.”
“Ambuja Cements (ACEM) is among the best cement companies in India. Its strong brand equity, focused segment mix (on retail/ trade), focused market mix (West, North and East) and well diversified fuel and transport mix enable it to enjoy high profitability (~INR1,070/ton for CY12E), capital efficiency (~28% RoCE) and payout (~32%). After four years of muted earnings growth, we estimate EPS growth of ~36% for CY12. This coupled with strong balance sheet (net cash of ~INR32b in CY12E) would enable it to fund future growth. The impending penalty by CCI on the cement industry for alleged cartelization could impact ACEM by ~INR7.5b. While this is a near-term headwind, our interactions with cement companies suggest that CCI's claims are untenable & would be challenged. Cement stocks have already corrected by 10-15% in the last one month and now factor in the possible penalty. However, government intervention in pricing is the key risk in our view.”
“Post correction, ACEM is trading at attractive valuations - EV of 7.5x CY12E EBITDA and 6.1x CY13E EBITDA. Its asset valuations are also attractive at USD125/ton for CY12 and USD108/ton for CY13. Even after factoring in the CCI penalty, the stock is available at an EV of 6.3x CY13E EBITDA and USD111/ton. At current valuations, ACEM trades at a discount to replacement cost, as against ~20% average premium since CY01. Further, it is trading at a discount to its peers, which is unprecedented as it has always traded at a premium to its peers due to superior operating performance. We upgrade the stock from Neutral to Buy, with a target price of INR200 (EV of 10x CY13E EBITDA) - an upside of 40%,” says Motilal Oswal research report.
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