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Equity Research Report: Ambuja Cements
A good business model in temporary distress amid the Adani saga; like steel, the cement industry is also a major beneficiary of India’s infra boom
Company Overview, Business Model & Competitors:
Ambuja Cements is one of the major Indian companies, engaged in the manufacture of cement, cement-related products, and clinkers. Ambuja Cements has a range of products for business-to-business (B2B) and retail markets (B2C). The Company's product, Ambuja Plus Roof Special, is suited for constructing roofs and slabs; it also offers to install rooftop rainwater harvesting technology. Its products also include Ambuja Powercem, which caters to the ready-mix (RMX) sector; Ambuja Railcem, which is designed for railways, and Ambuja Buildcem, which serves the requirements of the mass housing segment.
Ambuja Cements also co-owns two brands in the micro materials category. These include Alccofine, which includes a range of micro slag materials, and Dirk Pozzocrete, which includes superfine fly ash. Alccofine Micro Materials are used in construction projects, such as metro rail, dams, roads, flyovers, bridges, and tunnels.
Ambuja Cements also sells clinker for both domestic and export markets. The company has entered into a strategic partnership with Holcim, the second-largest cement manufacturer in the world since 2006. Holcim had, in January’2006, bought a 14.8% promoters' stake in the GACL (Gujrat Ambuja Cement Ltd) for Rs.21.4B. From 2010 to 2022, Holcim held a 61.62% controlling stake in Ambuja Cements. On 14th April 2022, Holcim announced that it would exit from the Indian market after 17 years of operations as part of a strategy to focus on core markets, and listed its stakes in Ambuja Cements and ACC for sale.
On 15th May’2022, Adani Group officially announced that it would acquire Holcim's stake in Ambuja Cements and ACC for $10.5B. In Sep’22, Adani group bought Holcim (Swiss giant) stake in Ambuja Cement and ACC for around $6.40B to become India’s 2nd largest cement player. Holcim sold its entire 63.15% stake in Ambuja Cements, which owns a 50.05% interest in ACC, as well as its 6.64% direct stake in ACC. Adani Group now has around 63.1% stake in Ambuja Cement directly; i.e. Adani Group is now the new promoter of both the company (Ambuja Cement and ACC).
Adani Group justified the $10.5B acquisition of Ambuja Cements and ACC (Holcim’s India cement business) as ‘historic’ as it made Adani Cements the 2nd largest cement manufacturer in India (after Grasim/Ultratech Cement) with two of the country's most prominent brands. Furthermore, Adani emphasized that this acquisition was made at a time when India is poised for a tremendous economic/infra boom.
Adani Cement or Adani Cement Industries Limited (ACIL) is a cement company based in Gujarat. It was incorporated by Adani Group on June’21. Adani Cement is a wholly-owned subsidiary of Adani Enterprises and has not begun its business operations. It was reported in June’21 that the Adani Group planned to set up a cement plant in Maharashtra which will have an initial capacity of 5 MT/annum with an approximate investment of INR 100B The Group has also proposed a 10MT/annum Lakhpat cement plant, but later put the plans for that plant on hold.
Now, Adani Cement primarily consists of Ambuja Cement and ACC; Adani may also merge these two cement companies into Adani Cement eventually in the coming days. Adani Cement (Ambuja Cement + ACC) now aims to double the capacity from 67.5 MTA to 140 MTA to serve growing infra and housing demand across India including Adani group’s various infra projects.
As per the Adani group, currently, Ambuja Cement has a cement capacity of 31MT with six integrated cement manufacturing plants and eight cement grinding units across the country. The company has many firsts to its credit – a captive port with four terminals that has facilitated timely, cost-effective, cleaner shipments of bulk cement to its customers.
To further add value to its customers, the company has launched innovative products like Ambuja Plus, Ambuja Cool Walls, Ambuja Kawach, and Ambuja Cement Compocem. The new products not only fulfill important customer needs but also help in significantly reducing carbon footprints. Ambuja Cement has provided hassle-free, home-building solutions with its uniquely sustainable development projects and environment-friendly practices since it started operations. India’s cement demand is expected to be robust in coming years due to huge spending in infra/transport and affordable housing/social infra.
Fast forward, now being a part of the beleaguered Adani group, Ambuja Cement scrip also ran far ahead of its fundamentals in 2022 from around 275 to 600 and then stumbled to almost 315 a few days ago after the Hindenburg’s bombshell research report. Although Hindenburg didn’t accuse Ambuja Cement directly of any fraudulent activity, Ambuja Cement's scrip is caught in the crossfire. But Ambuja Cement is a good world-class asset/business model, which is in temporary distress due to Adani proximity.
The market may be also concerned about the leverage of the Adani group, which also pledged a significant part of the promoter’s stake to fund the Ambuja/ACC acquisition deal. In any way, after the Hindenburg controversy, the Adani group may prepay lenders, which partly financed the Adani takeover deal of ACC/Ambuja cement. Still, the market may be also concerned that Adani will use the positive cash flow of these two cement assets (Ambuja/ACC) to repay debt and fund other CAPEX. The main competitors of Adani Cement are Ultratech Cement, Shree Cement, Bharat Dalmia, J.K. Cement, Ramco Cements, India Cements, Heidelberg Cement, etc.
Key managers: Ajay Kapur (CEO)
Board Members: Gautam Adani (Chairman)
Key Shareholders: Adani Family (Promoters)
Highlights of Q4CY22 report card: Ambuja Cement (Consolidated-INR 100 Cr=1B)
· Core operating revenue Rs.79.07B vs 71.43B sequentially (+10.69%) and 76.25B yearly (+3.69%)
· Operating expenses Rs.68.98B vs 68.09B sequentially (+1.32%) and 64.97B yearly (+6.18%)
· EBITDA Rs.10.08B vs 3.34B sequentially (+201.47%) and 11.28B yearly (-10.63%)
· Interest payment Rs.0.4304B vs 0.4051B sequentially (+6.25%) and 0.3820B yearly (+12.67%)
· Core operating profit (EBTDA=EBITDA-INTT) Rs.9.65B vs 2.94B sequentially (+228.38%) and 10.90B yearly (-11.45%)
· Core operating EPS (EBTDA/Share) Rs.4.86 vs 1.48 sequentially (+223.38%) and 5.49 yearly (-11.45%)
· EBITDA margin 12.75% vs 4.68% sequentially (+8.07 bps) and 14.80% yearly (-2.04 bps)
· Interest/EBITDA: 4.27% vs 12.11% sequentially (-7.84 bps) and 3.39% yearly (+0.88 bps)
· EBTDA/TON Rs.704.55 vs 229.64 sequentially (+206.81%) and 767.61 yearly (-7.37%)
· The sequential jump in core operating EPS and EBITDA margin due to lower cost of fuel (coal) and logistics
· Reduced cost of fuel/coal due to maximization of low-cost domestic coal and zero import of U.S. petcoke
· Fixed price long-term contract to mitigate price volatility
· Expansion of green field (own) coal mine at Gare Palma and group synergies on coal procurement
· Lower logistic costs due to serving short-led markets directly to customers (~40% of sales volume within 150 km market
· Improved synergies between Ambuja and ACC to cater to natural markets at the lowest logistic costs
· Improvement in the rail-road transportation mix
· Planning CAPEX to increase ownership of rail rakes
· Also improving transport through shipping/coastal movement at lower logistic costs
· Improving plant efficiencies, usage of alternate/green fuel, higher energy efficiencies to reduce power consumption, and taking steps to reduce packing bag cost by 15% with assured long-term supplies
· Debottlenecking initiatives at various plants to improve capacity by 2-3 MTA
· Raw material (RM) cost is expected to reduce by 5%
· Fly ash dryer for the usage of wet fly ash
· Long-term contract with Thermal power companies to bring down fly ash cost by 15%
· Replacing costly gypsum with low-cost phospo-gypsum
· Better/growing demand and stable prices for cement and clinker with capacity utilization at 81%
· Improving EBITDA/Ton (Rs.829 vs 340 sequentially and 854 yearly) due to higher sales of premium products
· Lower RM cost; expected -15% in FY24
· Overall demand growth is expected to remain positive, facilitate higher capacity utilization, and cost reduction/optimization will result in higher EBITDA
Highlights of December QTR earnings concall: Ambuja Cement (8th Feb’23)
· The first full-fledged quarter under the new promoter, Adani Group.
· The company has in a real sense embarked on a transformational journey, which has resulted in sizable operational efficiencies across all the business parameters and which has resulted in a good jump in the financial performance quarter-on-quarter
· On the industry level, the cement industry saw higher capacity production with a good pickup in demand during the quarter
· We have seen a healthy increase in our top line of around 11%, coupled with a good reduction in the overall cost led by lower fuel, RM, and logistic costs along with other operational efficiencies including better synergies between various Adani groups of companies leading to higher EBITDA margin sequentially
· Better synergies between Ambuja-ACC and other Adani group companies
· The top line is expected to grow healthy going forward due to increasing demand, new capacity utilization, and debottlenecking of additional capacity and asset sweating
· Strong product portfolios and brand values along with premium products in core markets
· Expected higher demand for cement due to higher government CAPEX for infra and housing
· Better performance on a standalone basis than overall consolidated
· Virtually debt free with cash in hand around Rs.94.54B will help both organic and inorganic expansion to achieve scale, market leadership, and higher profitability/margin expansion (by reducing cost)
· Better management of the working capital cycle
· Taking further steps to strengthen ESG leadership through the sustainable development plan
· Aiming to double capacity to 140MT by the next five years as committed by Adani group during take over
· Presently emphasizing organic/debottlenecking (greenfield & brownfield) expansion to enhance the operating capacity
· Stressing on energy saving cost and synergies between various Adani group companies for raw materials and finished products ecosystem resulting in better synergies and optimization of OPEX
· No foul play between related entities (group companies/subsidiaries) for dealing with coal; all cola trading/supply is as per regulatory framework/rule ensuring ‘arm’s length principle
· Supply of coal by Adani group companies resulting in lower fuel cost to some extent
· The present synergy between Ambuja Cement and ACC under Adani Cement resulted in a lot of cost savings, but an official merger is not on the table right now; may happen later
· No foul play in the CAPITAL ADVANCE entry in Ambuja Cement B/S and it’s a part of normal CAPEX
· No comment about the promoter’s (Adani) personal debt to acquire Ambuja Cement and ACC (whether the promoter can use Ambuja/ACC positive cash flow); but there is a definitive dividend distribution policy in place
· The company is looking to leverage Adani Port's coastal/sea transportation synergy to optimize cost and OPEX
· As of now Ambuja/ACC is paying advance payments to various government companies for coal, and fly ash for secure supply; but the company (Adani Cement) is also exploring such supplies from various group companies as per the RPT pricing mechanism, which will ensure optimization of OPEX as there may not be any requirement of advance payment
· There will also be synergy in railway transportation (by taking advantage of using own railway wagons under the railway scheme)
· Despite aiming to be lower cost cement producer, Adani Cement will not undercut the market (by cutting prices); it will stress on expanding into a new market to cater to strong brands of Ambuja/ACC
· But for B2B large buyer segment (various government/private infra projects); it may employ various pricing strategies to win the market
· Presently Ambuja and ACC are working as separate cement divisions under common Adani Cement management, which is ensuring cost optimization synergy ensuring profitability of both entities separately without conflict of interest
· Despite procurement synergies with various group companies, all individual company is ensuring their business interest by ensuring arm’s length and fair pricing strategy; i.e. it will not affect the financial performance of any group company and also at the discretion of any specific group company
· Ambuja has a captive coal mine at Gare Palma, which caters to almost 20-25% of the overall coal requirement of Ambuja; but ACC has no such captive coal mine and is thus completely dependent on 3rd party supply including imports
· Ambuja/ACC was already under various cost-saving programs long before the Adani takeover, but the Adani group is now trying to add value thereby optimizing/lowering the cost of fuel, RM, and logistics due to various synergies with group companies
· Industry (cement) demand will grow by around 8-10% CAGR if the economy continues to grow around 6-8% (real GDP)
· The company believes that India's growth story will ensure much higher per-capital cement consumption in the country in the coming years
· EBITDA/Ton will be in four digits in coming quarters (presently at around 829/-)
· Presently Adani Cement is paying some royalty payment to Holcim, but from March QTR, there will be no such payment and the company is expected to add around Rs.2.70B in cash flow
· IT transition from the Holcim group is now almost complete
· The company is expected to complete all the CAPEX-related expansions/debottlenecking by mid/late 2024; may provide more details during March’23 earnings concall
· A new promoter (Adani) is infusing fresh capital into the company as per commitment, but Ambuja Cement has already around Rs.90.50B free cash in hand, while generating around Rs.40.50-50.00B cash from operations every year; thus having substantial cash-rich company along with zero debt status, CAPEX amount is not an issue
Under the banner of Adani, Ambuja Cement is now aiming to increase EBITDA margin by various cost/group synergies coupled with the expansion of capacity to cater to growing demand in India, expected to be around +10% CAGR in line with nominal GDP growths and the government emphasize on infra/housing CAPEX. India’s cement manufacturing capacity is now estimated at around 525 MTA, which may reach around 600 MTA by 2025; i.e. an average CAGR of around 7% against a projected demand increase of around 10%. India’s cement production reached 329 MTA in FY20 and is projected to reach 381 MTA by FY22 against the consumption of around 327 MTA (FY20) and an estimated 379 MTA (FY22).
There is also good pricing power as the cement industry is now in a virtual cartel among the top 10 players after consolidation, JV, MSA, etc in the last few years. India’s top-10 cement players are now Ultra Tech (market share 25%), Adani Cement (14%-Ambuja + ACC), Shree Cements (7%), Dalmia Bharat (5%), Birla Corp (3%), India Cement (3%), Orient Cement (1%), and Heidelberg Cement (2%). India is the 2nd largest producer of cement in the world after China and accounts for more than 7% of the global installed capacity. The government's thrust on various infra projects including transport, affordable housing, and the construction sector is a huge boost for the cement industry. Also, various state elections in 2023 before the early 2024 general election, the G20 presidency, and the likely bid for the 2035 Olympics by India may result in substantially higher infra spending and cement.
The Indian Federal and state government may spend over Rs.20T for infra in FY24 across various projects from transportation (railways and roads), healthcare, education, housing, and urban/rural development. Looking ahead India will also spend a cumulative Rs.100T from 2022-27 for various infra projects under PM Gati Shakti's plan. All these require incremental/huge amounts of cement. India has the advantage of the ready availability of raw materials for making cement, such as limestone, gypsum, fly ash, and coal (affordable fuel).
Fair valuation: Ambuja Cement: Rs.429-500-585-687 by FY: 23-25
Ambuja Cement reported a core operating EPS of around Rs.9.38 in CY22 against 15.27 in CY21, 12.25 in CY20, 11.15 in CY19, and 9.67 in CY18. Now considering various pros & cons as discussed above, Adani’s efforts to optimize the cost of production, and the expected surge in demand for cement amid the government’s infra thrust, Ambuja Cement may report 16.92 core operating EPS in FY23 (Mar’23 TTM EPS) and subsequently +25% CAGR in core operating EPS from FY:24-26. Thus assuming core operating EPS around 16.92-21.15-26.44-33.05 and an average core operating PE of 25, the fair value may be around 423-529-661-826 for FY: 24-26 (as per EPS/PE valuation metrics).
Similarly, if we consider BVPS/PB (Book Value/share) and OCFS (Operating Cash Flow/share) valuation metrics along with traditional EPS/PE, then the average valuation may be around Rs.429-500-585-687 for FY: 24-26. As the financial market generally discounts 1Y projected EPS in advance, Ambuja Cement may scale 429-500-585-687 by FY: 23-25
Ambuja Cement is expanding its capacity to meet the growing Cement demand in India, and it has outlined its expansion program to take the total capacity of both Ambuja and ACC combined to 140 MTPA from the current 68 MTPA by FY28. The company aims to fund its expansion through internal accruals. The company is also working on many synergies with other Adani group companies to optimize logistics, fuel sourcing, and integration between the two companies, which may lead to better EBITDA/ton in the coming years. Adani Cement’s main competitor Grasim/Ultratech Cement is also expanding its capacity to around 154 MTPA by FY26 from present levels of 117 MTPA.
In 2022, the EBITDA margin of Indian cement companies including Ambuja Cement was also affected by higher raw material and energy costs due to the elevated cost of coal and petcoke. But since late 2022, these costs have been moderated, while the demand for cement is also increasing due to India’s infra boom ahead of various state elections and also the May’24 general election, which may lead to better realizations (EBITDA/T) in the coming years.
Adani Cements is aiming to double its capacity and achieve an EBITDA of Rs.175B by FY28 (EBITD/T around Rs.1470). For FY24, the company is aiming to improve EBITDA/T by Rs.300-400 through various operational efficiencies/group synergies and capacity expansion by around 24 MT. Ambuja Cements is relying on various cost-saving initiatives in energy, RM sourcing, optimization of logistics, manpower streamlining, and a change in product mix with a strategic focus on 9-high growth cement states (RJ, PB, HP, UP, J&K, Bihar, JHK, MH, and KA).
Capacity utilization of Ambuja Cements is now around 50%, which may improve to 75% amid incrementally higher demand for cement (in line with a +10% nominal GDP growth rate) and higher market share in the coming days. India is now the 2nd largest consumer and producer of cement (after China). Cement production is expected to increase by around +12% CAGR in the coming years to cope with increasing demand amid a huge infra push.
Indian Cement Industry Outlook:
As India has a high quantity and quality of limestone deposits throughout the country, the cement industry promises huge growth potential. Almost 50% of operating costs come from energy and logistics for the cement industry. At present, the Installed capacity of cement in India is 500 MTPA with the production of 298 MTPA (around 60% capacity utilization). India’s cement production capacity is expected to reach 550 and 660 MTPA by 2025-30. The cement demand in India is estimated to be around 420 MTPA by FY27 driven by the expanding/incremental demand of different sectors, i.e., transport infra, power, housing, commercial construction, and industrial construction. By 2030, India may be a $5T economy (in terms of nominal GDP), 3rd largest in the world (from around $3.5T currently). Then cement demand in India may also increase to around 660 MMTA even before 2030. Thus there is a case for more production capacity and cement players may gradually gain more pricing power.
Risk: Proximity of Adani group
The credibility of the Adani group may be far below that of Tata, and Reliance (under Mukesh Ambani) for a long, but it’s a known fact and most of Hindenburg’s report contents/allegations are nothing new. But at the same time, no big industrialist/business entity is a saint; they are improvising as per evolving political and economic situation/reality in the country. Adani Enterprise is involved in various traditional infra and utility projects, which have a normally long gestation period, capex heavy, and low operating margins. Adani Enterprise is expecting India's growth story will reflect in its growth.
Now even considering its proximity with the current Federal Government of India (Modi/BJP) and also various non-congress or even congress-ruled state governments and infra thrust ahead of the G20 event, 2024 general election, and likely big sporting events in the next 10-20 years, the transition from fossil fuel to EV, all infra/utility/cement companies including Adani may also report robust growth in EBITDA in the coming years.
Thus without considering the Hindenburg report/allegations, Adani’s reply, and current political controversies, if we only believe in Adani’s financial statements, management commentaries, and potential India/Adani growth story, a world-class cement asset like Ambuja may be an attractive investment in the current disruptive situation, especially if we consider almost zero debt for Ambuja balance sheet (unlike other Adani group companies which are highly leveraged).
In any way, Adani is an influential group; although it’s not come under ‘too big to fall’ for the Indian economy, the government will not allow it to fall under any circumstances for the financial market and also political/BJP stability. Thus despite various controversies, the Adani group may survive due to its proximity with the Modi government and also various opposition parties (providing a huge political donation to not only BJP but also various other opposition parties including INC and TMC like all other big business houses).
Despite huge falls in share prices for various Adani group companies, there is little panic among big Adani lenders or even in the market as smart investors/traders/HNI (including Ambani/Adani) all do short sell through various fronts (directly/indirectly) even their own companies in times of distress to take advantage of the volatility and possible margin call. This time, Adani is also able to meet the margin call without any big issues.
Adani Group, being headquartered in Ahmedabad, the top management of Adani Cements is now largely operating from that city instead Mumbai (HQ of both Ambuja Cements and ACC), creating some issues for existing employees (management cadre).
The $10.5B acquisitions of Holcim’s stake in Ambuja Cements and ACC in Sep’22 was India’s largest-ever M&A transaction in the infrastructure and material space. But Adani Group has also taken a huge loan to fund this M&A. As per some reports, Adani Group is seeking to renegotiate the terms of the outstanding loans which are worth $4B. The huge debt has led to a fear of job cuts within the company, especially after Hindenburg’s report.
Adani Cement has pre-paid $200M recently to reduce a mezzanine loan of $1B taken from global banks to fund the purchase of the Indian business (Ambuja Cements and ACC) of Holcim. The pre-payment will help Adani to seek an extension of the debt taken to fund the acquisition by three years.
To finance the acquisition of Holcim’s India cement assets, a consortium of global banks provided loans to the Adani Group with $4.5B. The mezzanine loan was due for maturity in September 2024. A mezzanine loan is a hybrid of debt and equity, where lenders provide capital to a company in exchange for the right to convert that debt into equity ownership in the future. Mezzanine loans are considered riskier than traditional bank loans and often come with higher interest rates to compensate for the additional risk. Thus there is also a risk for equity dilution after Sep’24, if a part of these loans are converted into equity.
As a recapitulation, Hindenburg alleges that it has traced entities in tax havens, which held huge stakes in listed Adani firms, and were related to Gautam Adani’s brother, Vinod. But as these facts were not disclosed, in effect, the promoters’ stakes in several listed firms exceeded the legal limit of 75%. If investigations find that these entities are related to Adani, it may pose big regulatory issues for the Adani group.
Since Hindenburg's report in late Jan’23, the total market capitalization of the Adani group has fallen above 50% against Hindenburg’s target of around 75% on average. Adani is now relying on an investigation by the market regulator SEBI, which is looking into Hindenburg's allegations and the group’s related party dealings following an SC directive.
Adani group recently assured investors that several top Japanese and European banks have reaffirmed confidence in them: "Global banks such as MUFG, SMBC, Mizuho, Standard Chartered, Barclays, and Deutsche Bank’ consortium lenders have reaffirmed confidence in Adani group”.
As immediate fallout of the Hindenburg report, Adani Enterprises has to withdraw Rs.0.20T (~$2B) FPO. But the group took several measures later, including selling stakes in four group companies to the US-based GQG Partners (renewed investor Rajiv Jain) for $1.87B or Rs. 0.15T in a bid to reduce debt levels and allay investor concerns. In the meantime, Adani Group has also proactively paid off around $2B in share-backed loans and fulfilled their bond repayments on schedule to calm market anxiety. Looking ahead, Adani may also merge Ambuja and ACC into Adani Cements officially, keeping two separate brands and markets under the present synergy.
On Saturday (29th April), SEBI moved SC and seeks another 6-month extension to complete its probe into Hindenburg’s allegations of ‘brazen stock manipulation’ and an ‘accounting fraud scheme’ by the Adani group. Being an influential conglomerate under too big to fall category, having proximity with Modi admin (BJP/RSS) - SEBI/SC/Government report will make sure that Adani group remains stable for India’s financial as-well-as political stability, everything being equal.
And SEBI will also ensure some progressive reduction in Adani’s promoter stake well below the prescribed 75% and improve free market float in the coming days. Whatever may be the allegations of the opposition political party led by INC (Rahul Gandhi), Adani will make sure an equilibrium field ahead of the 2024 general election (funding).
The government is now deleveraging almost all public sectors infra assets, especially roads, airports, ports, power, etc. In India, Adani is now a systematically important industrial group besides Ambani, Tata, Jindal, etc, which are important to take part in India’s infra boom (PPP/BOT, etc); otherwise, who will fund/manage India’s growth story?
Technical View: Ambuja Cements: 397 (28/04/23-EOD)
Looking ahead, whatever may be the narrative, technically, Ambuja Cements now has to sustain above 410 for a further rally to 421/430-460/485-500-525/535-550/575 and 600 in the coming days (bullish case scenario). On the flip side, sustaining below 405, Ambuja Cements may again fall to 397/380-370/350* and 335/315*-305/295 and 289/273-244/225 in the coming days (bear case scenario).
P&L Analysis: Ambuja Cements (consolidated)-QLY
P&L Analysis: Ambuja Cements (consolidated)-YLY
B/S Analysis: Ambuja Cements (consolidated)
C/F Analysis: Ambuja Cements (consolidated)