Given capacity constraints and weak industry demand, we expect cement volumes to be subdued in CY19.
Based on our recent interaction with Ambuja Cement (ACEM), we infer the company is focusing on, completing the 3.1mtpa clinker and 1.8mtpa cement capex from Q3CY20 (implying material volume growth visibility in CY21); increasing the sales of premium products (from about 10% of trade sales to 15% over the next one–two years); and delivering tangible savings from the Master Supply Agreement (MSA) with subsidiary ACC (to ~3% of PBT from CY20).
Given capacity constraints and weak industry demand, we expect cement volumes to be subdued in CY19. Nonetheless, ACEM will benefit from easing fuel cost and healthy cement prices in its geographies. We retain our positive fundamental view on the industry and maintain ‘hold’ on ACEM with a TP of Rs 222.
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Our recent interaction revealed ACEM is focusing on commissioning the 3.1mtpa greenfield clinker plant at Marwar-Mundwa in Rajasthan (north India) by Q3CY20. Assuming stabilisation period of a few months, the new clinker unit offers scope of volume uptick in CY21. We note that ACEM’s last clinker addition was in CY10.
ACEM reported a 38% surge in sales of premium products in CY18, making up about 10% of trade sales that are 80% of overall volumes. In H1CY19, sales of premium products grew by 16% YoY, and ACEM intends to ramp up the sale of these high-margin products to 15% of trade sales over the next one–two years. ACEM is also stepping up efforts to drive up benefits from its MSA with ACC, and believes that tangible gains (being ~3% of PBT) are achievable in CY20. ACEM’s commitment to achieve medium-term goals (as discussed above) marries well with our positive sector view.