Motilal Oswal neutral on Ambuja Cements; target Rs 202

"ACEM's existing clinker capacity of ~16.5mt is only sufficient for annual cement production of ~24mt, which is 9% growth over CY12. Its new capacity of 4.5m tons is expected only in CY15 (orders yet to be placed, awaiting approval from the board). While it would de-bottleneck capacities to meet growth, any higher than estimated 8% CAGR in CY12-14, would restrict ACEM's growth in CY14-15. Royalty increase to hurt CY13E/14E EPS, risk of further increase from CY15E.

Though introduction of royalty fees of 1% (v/s proposal of 2%) to Holcim (in lieu of fixed fees paid) will impact ACEM's CY13E/14E EPS moderately by 3-4%, it introduces uncertainty to ACEM's cost structure as rate of royalty will be revised post CY14. Recent increase in royalty for PT Holcim Indonesia (from existing 1.5% to 5% from CY13) raises the discomfort over future royalty for ACEM.

We expect a steady dilution in ACEM's premium in profitability over peers hereon due to (1) limited scope for an uptick in operating leverage and (2) impact of increased royalty to Holcim. Further, potential risk to profitability exists in the form of a) gradual reduction in subsidies over next 4-5 years, b) further increase in royalty from CY15 and c) capacity constraint in CY14/15. ACEM would have lower EPS CAGR of 15.6% (CY12-14E), against 17-20% for its large peers.

ACEM is trading at 14%/12% premium to ACC/UltraTech (on CY14 earning valuation). We believe that at an EV of 7.9x CY14E EBITDA and USD157/ton, valuations factor ACEM's superior profitability. We downgrade the stock from a Buy to Neutral and value it at 7.9x CY14E EV/EBITDA (v/s 9x earlier) to factor the risk of further increase in royalty, potentially slower-than-industry growth in CY15 and gradual reduction in subsidies. Our target price is INR202," says Motilal Oswal research eport.

Non-Institutions holding more than 90% in Indian cos

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