We resume coverage on Ambuja and ACC post a period of legal restriction. Following the recent amalgamation, Ambuja now owns 50% in ACC (Holcim’s direct holding in ACC now at 0.3% vs. 50.3% earlier, while Holcim holds 61.1% in Ambuja vs. 50.3% earlier).
In Oct15, in our deep dive analysis we concluded that multiples are sensitive to cement pricing. We expect another cement price bounce (one leg up during Feb-May16) post the monsoon (5-10% correction in some regions) in tandem with rising demand.
Cost pressures will likely appear as petcoke prices have surged from $30 in Jan16 to $80 (power/fuel 25% of costs, petcoke usage for majors ranges from 50-100% of coal requirement); we are not worried as producers should be able to hike prices.
Despite the rally in stocks (30- 60% in 6m), reiterate positive stance; pecking order: Stock direction should be the same as Ambuja owns 50% in ACC + cement price trajectory should largely be similar across geographies.
The differentiating factor, in our view, is growth capex — more likely in Ambuja (4.5mt potentially in the pipeline, which if implemented would enhance capacity by ~15%) vs. dividend upstreaming at ACC.
Moreover, some ACC mines have a limited reserve life, which may impact future growth. Thus, we think Ambuja should trade at a premium. Both trade at ~12x EV/EBITDA indicating more upside for Ambuja.