Ambuja Cements (Buy)
India’s cement sector is favourably placed to benefit from the multiple tailwinds: rising demand (14 per cent y-o-y in FY19), improving utilisations and subsiding cost inflation. Additionally, we forecast lower-than-expected supply to come through on account of volatile earnings, stretched balance sheets of certain players and higher costs of funding. As a result, we believe 45 per cent of the FY19-21 pipeline capacity (30-35 mtpa) will be delayed, further improving the demand-supply dynamics. Costs would be a key tailwind for the sector as prices of coal/petcoke/diesel have declined 15 per cent/7 per cent/7 per cent. Further, with relaxation of axle load norms, freight costs are expected to decline 2-4 per cent.
We estimate a cumulative benefit of ₹120-150/t to accrue to companies from 4Q (15-20 per cent of sector EBITDA/t).
We prefer select mid-caps over large caps as sector earnings is expected to stabilise and mid-caps have significantly underperformed large-caps (26 per cent — six months).
While we are building in ₹100-150/t EBITDA per tonne improvement over FY19-21, an increase in prices on the back of higher utilisation would lead to an earnings upgrade in the sector. We upgrade Ambuja to ‘buy’ as HolcimLafarge’s announcement of 8.5 mtpa expansion in India addresses concerns on the company’s growth profile.