Seasonally, the September quarter is weak for the cement industry. The national average price per 50 kg bag fell to about Rs 308 from Rs 322 sequentially. The decline was
primarily driven by the 7% skid in North Indian prices, due to a higher base after the June price hikes and the seasonally weaker monsoon period.
However, national players benefited from the stronger, double-digit price hikes taken in other parts of India in June.
Last week, in its regular quarterly disclosure, Ultratech Cement posted a 5% increase in price. We expect similar for Ambuja. We value Ambuja as a consolidated entity, owning both ACC and Ambuja brands. But standalone Ambuja has much higher operating leverage, as its adjusted earnings before interest, tax, depreciation (EBITDA) margins for the last quarter stood at 21.6% versus ACC’s 14.6% for the last quarter. We expect ACC
to show better performance owing to the price hikes taken in June, and boost the consolidated EBITDA margins to 16.1% in the September quarter from 12.1% versus the
prior year.
Ambuja remains undervalued at current levels of Rs 216 per share versus our fair value estimate of Rs 262 per share. Ambuja’s narrow economic moat is underpinned by its strong pricing power in key markets. The industry-level entry barriers that benefit Ambuja stem from the proximity to raw-material sources that manufacturing plants require, capital intensity, and cement’s ponderously low value-to-weight ratio. High fair value uncertainty reflects exposure to construction and housing, which are cyclical, and linked to economic activity.
Ambuja has one of the industry's strongest balance sheets. Our 5-year forecast includes an assumption for 10% capacity addition per annum, and we believe the company will pursue both organic and inorganic expansions to achieve this growth. Long-term demand for building materials remains attractive, as the government continues its spending spree on infrastructure and housing.
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